Economy, Society, and History

This lecture will be on time preference, on interest and capital, and on capital accumulation. I have already to a certain extent touched upon the problem of capital accumulation. We said that agricultural societies made it possible for the first time for capital goods to be accumulated, whereas the possibilities for accumulating much in terms of capital goods in hunter-gatherer societies that move from place to place are very limited. And this subject is the third dimension that we need to cover in order to understand the wealth of nations, apart from ideological factors, which I will come to in a future lecture, besides the division of labor, the development of money, and the universalization of money. Capital accumulation is the third leg on which societies stand.

I will begin with some theoretical considerations, some theoretical explanations about the phenomenon of time preference and how it relates to capital and capital accumulation in particular. People do not just have a preference for more goods over less. I discussed how this preference explains, for instance, why there is a division of labor. People also have a preference for goods earlier, satisfaction earlier, as compared to satisfaction later, goods later. Mankind cannot wait forever for satisfaction. Waiting for certain results involves a sacrifice, and without capital goods—recall, we make the distinction between consumer goods, which are directly useful, and producer goods, which are only indirectly useful. There are very few desires that we can satisfy immediately or instantaneously, well, maybe picking a berry, that immediately leads to satisfaction. And there is, of course, leisure time, just lazing around, that can also be immediately satisfied without doing anything else about it.

But, most of our desires require that we use intermediate products in order to satisfy them, or we need intermediate products in order to be more productive; that is, if you want to increase the amount of immediately usable consumer goods, we have to go about it in some sort of roundabout way, rather than picking berries and satisfying ourselves directly in this way. What capital goods do is they allow us a greater production of the same goods, or they allow us to produce goods that cannot be attained at all without the help of capital goods. And in order to attain capital goods, it is necessary that we save, that we consume less than we could consume, and use these saved-up funds to feed ourselves during the period of time that is necessary in order to complete the construction of capital goods, with the help of which, then, we can attain larger output of consumer goods or attain goals that we could not attain without capital goods at all.

This restriction on possible consumption is what we call saving, and the transfer of our saved funds, allocating—using—land and labor to construct or bring into existence capital goods, is called investment. And the question that we always face is the following. Does the utility that is achieved by the higher productivity of longer, roundabout production processes, that is, a utility that we achieve by roundabout methods of production, exceed the subjective sacrifice that we must make of present goods that we could conceivably consume? Or to put it differently, the decision of an actor regarding what objects to invest in will depend on the expected utility of the forthcoming consumer goods, on the durability of these forthcoming consumer goods, and on the length of time that it takes before we attain these future consumer goods. And we can then explain the entire act of deciding whether or not to perform an act of capital formation as the balancing of relative utilities—that’s the expected present utility that we attach to future goods, as compared to the utility of present goods available through consumption, discounted by the rate of time preference. That is, by the rate at which we value present goods more highly than future goods. Present goods are always valued more highly than future goods; present goods sell at a premium against future goods—or to put it the other way around, future goods sell at a discount against present goods. And this phenomenon, this discount or this premium, depending on what the angle is from which we look at the phenomenon, is called interest.

I want to illustrate these initial abstract remarks by looking for a moment at a simple Robinson Crusoe economy. Let’s assume that Robinson Crusoe is the most knowledgeable person on Earth. He knows all the technological recipes that mankind knows, but he is stranded alone on an island. On this island, there is initially nothing other than land, that is, nature-given resources, and labor from his own body, and his own knowledge incorporated in it. And let us assume that the immediately available consumer good that is available to him is fish, and thus he now has to make a decision as to how he will produce this consumer good of fish. Given, as I said, that Robinson Crusoe knows every technological recipe under the sun, we can imagine that he knows various techniques for how to attain his end, that is, fish as a consumer good. He can, for instance, use his bare hands to obtain fish, by grabbing into the water and pulling the fish out. He can build a net with which to catch fish. He can build a fishing trawler, a boat with a net to catch fish, and we might easily imagine that there exist various other technologies that he is aware of as well.

The question that Robinson Crusoe faces is then: “What shall I do, how shall I produce fish?” And the first thing that is worth pointing out here is that the fact that he knows about extremely productive methods of catching fish, let’s say using a fishing trawler, that this fact does not help him much in his initial situation. And the reason for this should be obvious: the reason has to do with the fact that he is constrained by time preference; that is, he cannot wait forever for the satisfaction of his most urgent desires, and if he were to start building a fishing trawler then he would likely be long dead from starvation before the fishing trawler is ever completed. So, he will have to start in a capital-less mode of production, without any capital goods, just using his bare hands to get fish out of the pond or the river or the ocean. When he’s done at the end of the day and he has caught ten fish, he will have to make a decision what to do with these ten fish.

Obviously, if he decides that he will consume all ten fish by the end of the day, then the following day he will be in the exact same position that he was on the day before. On the other hand, if he decides to put away some fish, a certain fraction of those that he could consume, then he engages in an act of saving, and he can now form some expectation as to how long it will take him to build a net, and what will be the output of fish, per hour, let’s say, that he can attain with the help of a net. And based on his evaluation of the time lag—let’s say it takes a week to build the net—and his expectation is that he will double or triple his output—he can now decide how much or how little he wants to save. If Robinson Crusoe has what we call a high degree of time preference, that is, he prefers present goods very highly over future goods, meaning saving presents a great sacrifice for him, then the process of saving will be relatively slow, and it will take quite a while before he has accumulated enough saved-up fish to be in a position to say that now I have saved enough fish to feed myself during the week that is necessary for me to build the net. And once the net comes into existence, then his standard of living goes up.

The same, of course, is true if he wants to move from stage two to stage three. Again, he would have to make an estimation of how long will it take him to build that fishing trawler, what will be the likely increase in productivity that he can achieve if he has the fishing trawler available, and then he determines how much or how little, in terms of saving, he is willing to do. Again, if his time preference is very high, preferring present satisfaction very much over future satisfaction, then the process of going from year to year will take a long time. If his time preference is very low, that is, he is willing to make larger sacrifices, then he can delay his future gratification more and save more, and the process of going from stage one to stage two, and from stage two to stage three, is shorter. Each step along the line, his standard of living increases. It should be clear from the outset that no one would engage in the construction of capital goods unless he expected that production with the help of a capital good will be more productive than production without a capital good. If I can produce ten fish per day by using my bare hands, and if by using a net I can also produce only ten fish per day, then obviously the net would never come into existence, because the entire time spent constructing the net would be nothing but sheer waste—that is, capital goods are always brought into existence with the expectation that production with capital goods is more productive than production without capital goods. Because of this, because of the productivity of capital goods, people are willing to pay a price for them. If the net did not yield a higher output per hour than using your bare hands, then obviously nobody would ever be willing to pay a price for the net. If the fishing trawler did not promise a larger output per hour than the net, then the price of the fishing trawler could not conceivably be higher than the price of the net, and so forth.

What holds men back, as far as investment and capital goods accumulation is concerned, is always time preference. We do not automatically choose the most productive method, but it is time preference, and, related to it, savings, that allows us or does not allow us to choose certain techniques or not to choose certain techniques. Let me, in order to illustrate this concept of time preference a little bit more, use some examples, some of which you’ll find in Mises, some of which I developed. Let’s assume we were like angels, who can live off love and air alone, that is, we have no need for consumption. We can imagine that an angel could in fact produce goods immediately and in the most productive fashion, even though the angel would not have any motive to produce at all; after all, he can live off love and air alone. But let’s say he had some sort of fund to produce large amounts of goods. Because the angel could wait forever, the interest rate, the degree to which he prefers present goods to future goods, is zero; it doesn’t make any difference to him whether he has a fish right now or a fish ten thousand years from now. For us, who are somewhat less than angelic, that does, of course, make a tremendous difference, whether we have fish ten thousand years from now or today or in one week. So, we are constrained by time preference; our interest rate is positive; it is higher than zero.

Take another example that helps illustrate this concept of time preference. Let’s assume, for instance—this gets us already into some sort of cultural influence on this phenomenon of time preference and capital accumulation—let’s assume, that we know that the world will end one week from now, and we are all perfectly certain that this is going to happen. What would then happen to the willingness to exchange present goods for future goods? And the answer is, of course, that this willingness would essentially disappear. The interest rate, in this case, would skyrocket. No interest payment would be high enough to induce anybody to sacrifice current consumption for a higher amount of future consumption because, after all, there is no future. There are, for instance, certain religious sects who believe that the world will soon go under, and very quickly the good guys will go to heaven and the bad guys will go someplace else. And these people, of course, stop saving. They will just have one more glorious week of consumption and then the whole story will be over.

As I said, all humans prefer present goods over future goods. But the degree to which people do this is different from individual to individual, and also from one specific group to another. Let me just give you a few examples, of which we know with pretty good certainty that their degree of time preference differs on average. Take little children, for instance. Little children have a very high degree of time preference. Another way to say it is that little children have tremendous difficulties delaying gratification. Promises of high rewards in the future do not necessarily induce children to make the current sacrifice of not consuming, of not satisfying current desires. There have been experiments done in this regard, such as: you give a dollar to a child and tell him that if you don’t spend the dollar until tomorrow, I’ll double the amount, you get another dollar. And if you then, tomorrow, have not spent $2, I will again, double it and give you $4, and so forth. You realize how high the interest rate here is, it’s 100 percent per day. If you have a calculator, you can figure out what sort of annual interest rate that is. Nonetheless, you will find that many children are absolutely incapable of accepting a deal such as this. They have to rush out to the 7-Eleven and get their Big Gulp right now, even though they could have two Big Gulps or four Big Gulps in a very short distance in the future. Or, another way to illustrate this would be to say that we offer a child a perfectly secure certificate that promises to pay $100 one year from now, but the child has the choice of selling right now this perfectly safe and secure promise of $100 in the future. Then we will find that the children might be willing to sell this certificate for only 10 cents, because waiting is basically intolerable for them.

Let me give you a few other examples and you realize, of course, depending on what sort of mentality exists among the public, capital accumulation can take forever or it can go quite quickly. If Robinson Crusoe had a childlike mentality, he might never ever reach the second stage, or if he does reach it, it might take him about one hundred years to do so.

I will move on to some other examples of groups. Very old people are sometimes said to go through a “second childhood.” This is not necessarily so, because very old people can choose to provide for future generations. But assuming that they do not care for future generations, or perhaps they do not have any offspring or any friends whom they want to hand over their own fortune to, and then, because their own remaining lifespan is very short, they have not much of a future left, so they go through the phase of a second childhood, by and large consuming and more or less entirely ceasing to accumulate any savings.

We can take the example of criminals, who are also, typically speaking—and I mean the normal run-of-the-mill-type criminal, not the white-collar-type criminal, the muggers, the murderers, the rapists and those friendly figures—characterized by high time preference. The way I explain this to my students is always using the following example. (Sometimes people hiss at it; most people like it.) Imagine a normal person who is in pursuit of a girl or vice versa, a girl in pursuit of a man. Then, what we do, of course, is take her out to dinner and bring her flowers and take her out to dinner again. We listen to the conversation; we are very impressed by all the deep thoughts that we hear. We have never heard anything interesting like that before in our lives. Of course, we entertain certain expectations, which are, of course, in the more or less distant future. This is how normal people operate. If you have a childlike mentality, but you have that in an adult body, then this sort of stuff is almost an impossible sacrifice; you cannot wait that long and then you become a rapist or something of that nature. Normally, in order to satisfy any desire, we have to work for a day, at least for a day. Then we get paid at the end of the day and then we can buy our beer. But, what if a day of waiting is too long? The only other alternative that you have is to look for some old lady and rob her of her purse and to satisfy your desires in this way.

I will give you another example that already touches upon a lecture that I will give later in the week. Democratic politicians also have a very high degree of time preference. They are in power for a very short period of time and what they do not loot right now, they will not be able to loot in five or six years. So, their intention is, of course, that I have to milk the public as much as possible now, because then, with a lot of tax income, I can make myself a lot of friends in the present, and who cares about the future?

The last example is one that has gotten me in deep trouble recently at my university. I have used that example for sixteen years or so and had never any problem with it whatsoever. This time, however, some fanatic wanted to bring me down; this whole process is still underway, so I warn you not to bring harassment suits against me again. I made the point that if you compare homosexuals to regular heterosexuals with families, you can say that homosexuals have a higher time preference because life ends with them. I always thought that that was so obvious, almost beyond dispute, and then pointed out in the next sentence, that this helps us understand, for instance, the attitude of a man like Keynes, whose economic philosophy was “in the long run, we are all dead.” Now, this is true for some people, but it is not true for most people, who, of course, have their own children and so forth, future generations to come. As I said, these harmless remarks have led to three months of harassment at my university, and the whole thing is still not over yet.

So, so much about the concept of time preference. Now I want to say a few words about the development of time preference and of interest over time, in the course of history. As you can imagine, this is not difficult, but rather intuitively immediately clear. We would expect that the degree of time preference should gradually fall in the course of human history. Something like what you see in Figure 1:

Figure 1: Historic Long-term Interest Rates

Sidney Homer, A History of Interest Rates (New Brunswick, NJ: Rutgers University Press, 1963), p. 507.

Here in Figure 2 we have interest, or a degree of time preference, on one axis, and on the other axis we have real money income, that is, income that can be converted into immediate present satisfaction. Then we would expect that with very low real income, the sacrifice of exchanging a present good for a future good is very high, and people will save and invest only small amounts, but as real incomes rise, the interest rate will gradually tend to fall. That is, savings, the volume of saving and investing, will become greater; intuitively that is perfectly clear. For a rich man, it is easier to save and invest than it is for a poor man. If we look over the course of history, we would find that capital accumulation—savings and investment—does become successively easier. It is more difficult at the beginning of mankind as it requires a bigger sacrifice, and it becomes successively easier as we grow wealthier. This is something that we can indeed see in history. This has been studied—long-run interest rates for the safest possible investments and so forth—and we find, by and large, that interest rates fall.

Of course, there are exceptions to this rule. If you have wars and so forth, then you have an increase in interest rates, because the risk attached to loans becomes significantly higher. But, we also have certain periods when the degree of time preference does seem to rise. I will come back to that again in a later lecture. This seems to be something that has happened in the twentieth century. We should have expected that interest rates, real interest rates, in the twentieth century should be lower than in the nineteenth century, given that on the average, wealth in society is greater in the twentieth century than in the nineteenth. However, we do not find this to be true; that is, the real interest rates in the twentieth century rarely, if ever, reach the low point that they reached around 1900, which was about 2.25 percent. The conclusion would be that the entire time preference schedule must have risen in the twentieth century, which would amount to saying that the population in the twentieth century has become somewhat more childlike than the population in the nineteenth century. We are somewhat more frivolous and hedonistic in our lifestyle than our forefathers or our parents and our grandparents were, despite the fact that it was more difficult for them to engage in savings and capital accumulation than it is for us.

Now, a word about the accumulation of capital. Obviously, in every society, it is possible to add something to the existing stock of capital, to maintain the existing stock of capital or to deplete the existing stock of capital. Even to maintain the existing stock of capital, continued savings is necessary because all capital goods wear out over time. That is what we call capital consumption. Capital consumption, however, can take quite some time before it becomes visible, because some capital goods last for a long time. For instance, when the Communists took over Russia, they inherited a substantial stock of capital goods: machines, houses, etc.; and after that, they were still able to go on for a while, but if, due to the fact that no private property or factors of production existed anymore, practically no savings were forthcoming, you could expect that eventually this inherited stock of capital goods would become dilapidated and in some ten, twenty, or thirty years, you would experience some sort of catastrophe. And this is what happened: all the capital goods were suddenly worn out, and nothing was there to replace them. The same thing is true for the process of capital accumulation.

Let me first point out the following. Obviously, the amount of capital accumulation depends not just on the time preference that various individuals have; it depends also on the security of private property rights. Imagine Friday, a second person, coming onto the island. We can imagine Friday to be like Robinson Crusoe, and they engage in division of labor. Then, the standard of living would go up, capital accumulation would be even faster than with Robinson Crusoe being alone; standards of living go higher and so forth. But, we can also imagine that Friday is different, perhaps a mugger from Brooklyn, and he sees that Robinson Crusoe has already built the fishing net or has already saved all sorts of fish and he says, “This is very nice that you have done this already for me and I’ll take the net, or I force you to pay a tax to me: half of the fish that you produce every day you will hand over to me.” Now, in that situation, you can of course easily imagine that the process of capital accumulation will be drastically slowed down, or will even come to a complete standstill. If we look at societies that are currently rich, we cannot necessarily infer that those societies are societies in which property rights receive the best possible protection. What we can only infer is that these must be societies in which property rights must have been well protected in the past, and it might well be that we encounter societies that are quite poor right now but which do have very secure private property rights. Of those societies, we would expect that in the future they will show rapid rates of growth.

One might say, for instance, that to a large extent, the endowment in the United States of capital goods is due to circumstances that are long gone. That is, a lot of the capital goods have been accumulated under far more favorable circumstances than the circumstances that currently exist, and we might already be in a phase of gradual capital consumption without actually knowing it. It might take us decades before we actually find out that this is the case. As far as the United States itself is concerned, savings rates are atrociously low. To a large extent, the United States still benefits from the fact that there are savers from other countries who still consider the United States a good place to invest their funds, despite the fact that property rights are no longer nearly as safe as they were in the nineteenth century. Just keep in mind that almost 40 percent of the saved-up fish of Robinson Crusoe is nowadays handed over to the mugger from Brooklyn! In the nineteenth century, this might have been 2 percent or 3 percent of the output of Robinson Crusoe. In any case, capital needs to be preserved, and in order to preserve it, it is necessary that there exists an institutional legal framework that makes private property safe. If this framework is lacking, then one should not be surprised that very little takes place in terms of capital accumulation.

Just imagine a place where there is an impending Communist revolution, where you must be fearful that maybe in the next election, the Communists will come to power and the first thing that they will do is expropriate all owners of capital goods. Now, imagine what that does to your motivation to engage in saving and the accumulation of additional capital. Large parts of the world are like this. That is, we explain the poverty of many countries by the fact that property rights in those countries have, for many, many years, sometimes for centuries, not been secure enough for people to engage in saving and the accumulation of capital.

Now I want to come to some historical illustrations, and I want to use population growth and city growth as vague approximations of what happens to capital accumulation. Recall, accumulating more capital means societies become richer; societies becoming richer implies that larger population sizes can be sustained. And recall some of the numbers that I gave you in previous lectures. Fifty thousand people lived on Earth about 100,000 years ago. Five million people lived at the beginning of the Neolithic Revolution, 10,000 to 12,000 years ago. At the year 1 AD, the population is estimated to have been somewhere between 170 million and 400 million. There was a far more rapid growth of the population after the Neolithic Revolution, a doubling of the population every 1,300 years; until the Neolithic Revolution, a doubling of the population happened every 13,000 years or so. That is, again, a reflection of the fact that in agricultural societies, there is already a significantly increased amount of capital accumulation that allows this larger population to be sustained.

In Figure 3, you see estimates of world population, beginning at 400 BC and going almost to the present, until 2000. You see also the wide variety of estimates, with considerable disagreement, especially regarding the early periods of mankind. During the period beginning with the Neolithic Revolution, we see the development of various civilizations, indicating, obviously, sharp increases in the accumulation of capital goods.

Table 1 gives you some sort of historical overview of these various civilizations, the beginning and the end, the name of the most dominant group, and finally the names of those groups that were responsible for the destruction of these civilizations. I already indicated in the previous lecture that in these early civilizations, Mesopotamia, Egypt, and China, we experienced for the first time major cities coming into existence, and we also have indications of specific new technologies being developed. Again, recall that it requires a certain amount of wealth and capital accumulation to allow people to develop new inventions and try out new things.

Just to give you some examples of the major technological capital goods developments that took place during the Babylonian civilization, that is in the period of 4500 BC to 2500 BC. Here we find plows used for the first time; we find wheeled carts for the first time; we find draft animals being used in agriculture; we find bricks being used for the first time, and magnificent buildings erected. We find what is quite unique and has not been repeated independently anywhere else in history, the invention of the arch, which allows, of course, construction of structures that otherwise would collapse under their own weight. And we know the arch concept was imported to other areas. We find the potter’s wheel. We find copper smelting. We find the development of bronze, which is a combination of tin and copper in certain combinations. We find the development of writing, which indicates that there must have been a class of intellectuals in existence, who can only be supported if there exists a certain amount of wealth in society. And a certain amount of wealth, of course, requires a certain amount of capital accumulation. We find quite far developed mathematical techniques in Babylonia, and we find traces of metallic money being used. And obviously in the cities, which reached sizes of 80,000 people or so, we had quite an extent of specialized professions coming forth.

But, as I said, there exist in history also periods that we can describe as economic disintegration; that is, some of these empires fall apart. There are invaders that destroy them, and the division of labor shrinks. Techniques that were once known become forgotten, and we would expect them, during those periods also, to experience a decline in population. If you look at the estimates of world population there, you find, for instance, that only from 1000 AD on do we again see something like a trend toward an increase in the population, whereas with the fall of Rome, shortly after 200 AD or so, we see by and large a stagnation in the overall population. For almost one thousand years, there is virtually no population growth that takes place. And even in the period after 1000 AD, there are some centuries that see a more or less significant decline. Look, for instance, at the thirteenth century: from 1200 to 1300 AD, there appears to be no increase in world population, indicating capital consumption taking place or at least no capital accumulation taking place; even more clearly, look at the fifteenth century, that is the 1400s: there is a clear decline during this century in terms of population, as compared to the previous century, and it takes almost two hundred years or so before the population size is reached again that had already been reached in the fourteenth century. And once again, look at the seventeenth century, which is the century of the Thirty Years’ War. Compare the numbers from 1600 to 1650, and you find that again there is a significant decline in population, which indicates, in this case, major wars and major destruction. And only from 1650 on do we see an uninterrupted rise in the population numbers. From 1650 to 1850, the doubling of the population required about two hundred years. Then, from 1850 to 1950, the doubling of the population is about every hundred years and after 1950, the doubling requires less than fifty years.

Another interesting topic in all this is to look at the growth of cities. Again, city growth being a rough indicator of what happens to capital accumulation. Before the year 1600, the ten or eleven largest cities were outside of Europe, they were: Beijing, which had more than 700,000; Istanbul, which had about 700,000; Agra in India, 500,000; Cairo, 400,000; Osaka, 400,000; Canton, 350,000; Edo, which is, I think, Tokyo, 350,000; Kyoto, also 350,000; Hangchow, 350,000, Lahore, 350,000, and Nanking, somewhat above 300,000. That corresponds, roughly, with what we know about the world. Until 1500 or so, there is absolutely no doubt that China was far more developed as a civilization than Western Europe. I will explain in later lectures what might be the causes of why this changed. Interestingly, the rapid growth of European cities, which were at this time small compared to Asian cities, sprang up in large numbers from about 1500 on, this rapid growth was unsurpassed by Asian cities.

Table 2 lists the thirty largest cities in Europe in the period from 1050 to 1800 AD. First, take a look at the total numbers at the very bottom and you see, of course, that the total numbers always go up, but they go up in a particularly drastic way only from about 1650 AD on, and before then the growth was comparatively moderate. But, if we take a look at specific cities, we can see in which way the centers of economic development changed: which places lost in significance, where obviously political events must have taken place that were unfavorable to capital accumulation, and how other places show a rapid increase in their ranks among the top thirty places. Let me just pick out a few cities here. Córdoba was the biggest city in 1050 AD. (The populations of Córdoba and Palermo are 450,000 and 350,000, respectively, and are somewhat in dispute as is noted in the table footnote, so I included the more realistic numbers of 150,000 and 120,000, respectively, for these two cities. Otherwise, that seems to be somewhat disproportionate.)

But, in any case, Córdoba, the biggest city in 1050 AD, has completely dropped out of the top thirty by 1500 AD. That’s a general tendency that we can say, that Spanish cities, or even more general, Southern European cities, lost increasingly in significance, and the center of economic development and capital accumulation shifted to the north. Take some other spectacular cities here—Palermo, for instance, which you realize is the second-biggest city around 1000 AD, has no more inhabitants in 1800 AD than it had in the year 1000. Obviously, Palermo was not exactly the center of economic development during this time, but rather was a dying city. The same is also true for Seville. Again, Seville ranks number three in 1000 AD and hundreds of years later has a population that is not in any significant way larger. Then look at the spectacular rise of Florence until 1330 AD. So, Florence is the lowest one in the first column, with 15,000 in the year 1000, and then moves rapidly up the rank order until about 1330 AD, where the population has increased from 15,000 to 95,000, and then a decline of Florence takes place. Look at the spectacular growth of London, which, in the last column, of course, is by far the biggest European city. In the previous column, it is the second biggest. In the year 1500 column, it has just 50,000 inhabitants and in 1330 AD, only 35,000 inhabitants. So, in this period from 1330 to 1800 AD, we see a spectacular rise of London, again, indicating, obviously, a very favorable climate for capital accumulation that existed there.

And interesting are also some cases of decline. For instance, there is a very quick rise and a very quick fall of Bruges (or Brügge), in what would be Belgium today. And then, the city of Bruges, after it falls, obviously the economic environment becomes very unfriendly. We see then, as a substitute, a very quick rise in the city size of Ghent, a neighboring city, which indicates to what extent neighboring cities competed against each other for capital accumulation and for merchants settling in those cities. And again, Ghent falls very quickly, to be overtaken by another city very close by, namely Antwerp. And then, Antwerp also falls very quickly and then we see the spectacular rise of Amsterdam, again, a city very close to Antwerp, again illustrating in this case the mobility of capital, people leaving one place because it offers less favorable conditions for capital accumulation and moving to other places not far away and exhibiting there a spectacular growth. A similar spectacular growth you find, for instance, in the city of Hamburg.