Invention, Entrepreneurship and Prosperity: The Dutch Golden Age Thijs ten Raa, Tilburg University Pierre Mohnen, Maastricht University Jan Luiten van Zanden and Bas van Leeuwen, Utrecht University The 17th century: the Dutch Golden Age • The early Golden Age spans the period 1590-1648 (the Year of Independence from Spain), a period of unprecedented innovation and prosperity. • Followed by a marked slackening, and after 1672 (the Year of Disaster, with the French-English invasion) stagnation. Jonathan Israel

• The Dutch Republic: Its Rise, Greatness, and Fall 1477-1806, Oxford University Press, 1998 • Israel dates the end of the Golden Age at 1702 (the death of William III, Stadholder of the Republic and King of England), although England had already taken over world leadership from the Dutch Republic Entrepreneurship and growth

• Dutch economy was and is small • Important source of growth bound to be international trade • Contributions of entrepreneurship to innovation transcend the standard categories of creation of new products and processes • Entrepreneurship also finds new markets for its products and creates new modes of trade. The Dutch were the globalization pioneers avant la lettre. Econometric analysis of historic economies • Several studies that analyze historical (industrial) output data econometrically, especially for England • Nick Crafts “Exogenous or Endogenous Growth? The Industrial Revolution Reconsidered,” Journal of Economic History (1995) • Cover the post-1700 period First econometric analysis of an older economy • Rich body of data, to analyze Total Factor Productivity (TFP) and its traditional driver, technology, or, more precisely product and process innovation. • However, because the Dutch economy was (and still is) extremely open, we must factor in the role of trade in innovation and TFP, and will find that the entrepreneurs played an important role in the process. Growth accounting

• Output Y grows but it may be a sheer size effect. • Output per worker, Y/L, may be bigger in some economies than others, chiefly due to the availability of machinery, capital K • Total Factor Productivity, TFP, is output per “factor input” How measure prosperity?

• TFP = output/input, hence TFP-growth = output growth – input growth • The Solow residual makes this precise. • Differentiate Y = F(L, K, t) totally w.r.t. time:

• dY = F’LdL + F’KdK + F’tdt = rdK + wdL + F’t • Divide by Y = wL + rK

• dY/Y = (wL/Y)dL/L+ (rK/Y)dK/K+ F’t/F

• SR = dY/Y -(wL/Y)dL/L-(rK/Y)dK/K= F’t/F The Cobb-Douglas function

• Y = c(t)LαK1-α • The marginal product of labor is αc(t)LαK1-α/L = αY/L = w • Hence α = wL/Y • TFP = Solow residual = c’/c • We may replace c by T, the level of TFP • Traditional driver: Innovations Between 1540 and 1807, Holland’s economy expanded and contracted Even TFP followed a hump-shaped pattern Y = TL.4K.3H.2A.1 => T = Y/L.4K.3H.2A.1 • Patent stock, P: • We start from an initial value of 0 (our time series begin 1540, while the first patent granted was only in 1559) • and use a 25 percent depreciation rate (Pakes and Schankerman, 1984) Entrepreneurship in overseas trading • Baltic • Spain and Portugal • When barred, the Dutch adopted new modes of trade, such as the ‘long haul’ route to the Indies (primarily the East) • New Amsterdam • The same considerations apply to the decline: • In the late 17th century, the Dutch showed less dynamism than the English and the French in opening up new strands of (Asian) commerce. Dutch shipping capacity data

• Sound (Baltic) • East-Indian Company VOC (Asia) • West-Indian Company WIC (Americas) • Rivers (Continental Europe) • “the Rest” Openness and Entrepreneurship

• Volume of trade, normalized by GDP (first moment) • Spread of trade (second moment) Entrepreneurship from 1540 (normalized to 100) to 1807 Regress TFP on patent stock, openness and entrepreneurship

•Elasticity of TFP to the patent stock of 0.03 is smaller but not far off 0.08. •Marginal return on a patent of 0.2% of the GDP; today 0.1%. •Openness, has an elasticity of 0.12. Today 0.43/0.15/0.22/0.21 for high/ upper-middle/lower-middle/low income countries (Lewer and Van den Berg) •An increase in entrepreneurial activity of 1% raises growth by one-seventh of a percentage point. Lessons

• The rise and decline of the Dutch Republic can be explained by a combination of the traditional TFP driver, innovations, and two trade facets: openness & entrepreneurship • Economic decline puts pressure on R&D outlays and calls for protection, but yielding to it aggravates the problems Competition in the 21st century Competition in the 17th century