Category Archives: Economic History

Brad DeLong’s History Lesson, and another Puzzle

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Interesting throughout, and difficult to excerpt.

You would imagine, therefore, that once the iron-hulled ocean-going screw-propellered steamship and the submarine telegraph cable had made their appearance, factory work worldwide would have rapidly gone to where labor was cheap. Yet from 1850-1980 that was not the case. Factory work by and large stayed where labor was expensive. And those economies that did manage to figure out how to utilize British Industrial Revolution and Second Industrial Revolution technologies at near-frontier levels of efficiency rapidly joined the club of rich economies that was the Global North.

I actually disagree with DeLong’s answer to this puzzle, which is that the underdeveloped world failed to industrialize because the countries of the Global South lacked strong home markets. I take the view that differences in culture and institutions were the key factors. I believe that it is Gregory Clark who pointed out that when early cotton manufacturing entrepreneurs took factories to India, they found that the workers did not function effectively.

Wither the Suburban Homeowner?

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The American Interest has a special issue devoted to Plutocracy and Democracy. On Thursday, the Hudson Institute hosted a discussion featuring various speakers, including Tyler Cowen. I watched some of it from home.

Apart from Tyler, the speakers in the first hour were dreadful. When a poli sci professor starts telling me that the root cause of the Trump phenomenon is people resenting the Citizens United Supreme Court case, I think that it is more likely that the root cause of the Trump phenomenon is people resenting narrow intellectuals like this poli sci professor.

As for the magazine, on line I read the article by Walter Russell Mead, which I strongly recommend. (Be careful–you are only allowed to read one article unless you subscribe. Keep an extra web browser handy.) He draws an interesting parallel.

The contemporary crisis of the middle strata in American society is perhaps best compared to the long and painful decline of the family farm. The American dream we know in our time—a good job and a nice house in a decent suburb with good schools—is not the classic version. The dream that animated the mass of colonists, that drove the Revolution and that drew millions of immigrants to the United States during the first century of independence, was the dream of owning one’s own farm. Up until the 20th century, most Americans lived in rural communities.

What Mead goes on to sat is that the family-farmer dream came to be replaced by the suburban (and small town) homeowner dream. However, he raises the prospect that this latter dream may be in the process of fading out. I wish he had developed this idea further. Let me try:

In the three decades following World War II, the lifestyle that people aspired to, and often could achieve, involved ownership of a house with a yard and reliance for transportation on a family car. Nowadays, many young professionals do not aspire to that lifestyle, preferring to live in urban condos and apartments and to dispense with personal automobiles. Meanwhile, the postwar lifestyle has become harder to achieve for many people.

Mead refers to the threatened class of homeowners and homeowner-aspirants as Crabgrass Jacksonians.

Crabgrass Jacksonians do not trust the professional class anymore: not the journalists, not the professors, not the bureaucrats, not the career politicians. They believe that if these folks get more resources and power they will simply abuse them. Give the educators more money and the professors will go off on more weird and arcane theoretical tangents and the teachers’ unions will kick back and relax. In neither case will they spend more time helping your kids get ready for real life. Give the bureaucrats more power and they will impose more counterproductive regulations that throttle small business. Give the lawyers more power and they will raise prices and clog commerce with lawsuits and red tape. Give the politicians more time in office and more tax money to spend and they will continue stroking the fat cats while calling rhetorically for change.

Again, I recommend the entire essay.

War and Mobility

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Concerning Civil War veterans, Dora L. Costa, Matthew E. Kahn, Christopher Roudiez, and Sven Wilson write,

Veterans preferred to move to a neighborhood or a county inhabited by men from their same war company. This co-location evidence highlights the existence of persistent social networks. In our study, the social network already exists but an individual veteran seeks out economic opportunities. A co-ordination game arises and by co-locating in cities, veterans can achieve the mutually beneficial gains from cities while still preserving their network.

I believe that something similar happened after World War II. I think that this new mobility might have been a significant factor in making the economy stronger after the war than it had been in the 1930s. It is easier for new patterns of sustainable specialization and trade to form if people are willing to move.

Was the Fed necessary?

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George Selgin writes,

Nationwide branch banking, by permitting one and the same bank to operate both in the countryside and in New York, would have avoided this dependence of the entire system on a handful of New York banks, as well as the periodic scramble for legal tender and ensuing market turmoil.

Selgin’s thesis is that the banking laws as of 1900 gave privileges to New York banks and that part of the impetus for the creation of the Fed was the preservation of those privileges.

Question from a Reader

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Are there one or two books you would recommend to understand the current state of the economy?

1. I am tempted to answer “no” and stop there.

2. Depends on what you want to understand. I think that Kindleberger’s Manias, Panics, and Crashes is probably good for understanding the way that financial bubbles show up and affect things. I think that McAfee and Brynjolfsson’s The Second Machine Age is good on contemporary structural change. Probably McCloskey’s Bourgeois Equality is good on the deep causes of what she calls “the great enrichment” (note, however, that I have yet to plow through the book).

3. When Specialization and Trade comes out, I am going to wish that a lot more people would read it than actually will do so.

Overblown, you say?

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Timothy Taylor writes,

I’ll add my obligatory reminder here that just because past concerns about automation replacing workers have turned out to be overblown certainly doesn’t prove that current concerns will also prove out to be overblown. But it is an historical fact that for the last two centuries, automation and technology has played a dramatic role in reshaping jobs, and also helped to lower the average work-week, without leading to a jobless dystopia.

He quotes from a speech warning of technological displacement of workers that was given in 1927 by then Secretary of Labor James J. Davis.

Taylor writes as if the dire prediction proved false. And yet, within 5 years, unemployment hit 25 percent. Those dots connect in the PSST story, but too many economists are fixated on Keynesian AD.

Compared with 100 Years Ago

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Timothy Taylor pulls some nuggets from an article by Carol Leon Boyd in the Monthly Labor Review.

BLS reported about 23,000 industrial deaths in 1913 among a workforce of 38 million, equivalent to a rate of 61 deaths per 100,000 workers. In contrast, the most recent data on overall occupational fatalities show a rate of 3.3 deaths per 100,000 workers.

That’s the sort of thing that doesn’t show up in GDP growth rate statistics.

There is much more at the link.

Two Historical Tales of Productivity.

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1. Dietrich Vollrath writes,

the weighted variance of log capital and log coal per worker is either 0.0188 (if you use Clark’s index of capital) or 0.0381 (if you use Clark’s data on looms equivalents). Either way, this is only 2.92% or 5.90%, respecitively, of the total variance in real wages. A tiny fraction of variation in real wages is driven by differences in capital per worker, and the rest must be explained by technology, human capital, or something else. Clark has disposed of technology as an explanation, so it could be human capital. Clark eliminates big human capital differnces (at least in terms of age structure or experience), so it has to be “something else”. That something else is either local effects or culture, depending on your choice of terms.

This refers to international comparisons of productivity in the cotton industry. Clark is Gregory.

2. Gerben Bakker, Nicholas Crafts, and Pieter Woltjer write,

Compared with Kendrick, we find that labour quality contributes more and TFP growth less. For this period as a whole, TFP growth accounted for about 60% of labour productivity growth rather than the 7/8th famously attributed to the residual by Solow (1957).1 Contrary to secular stagnation pessimism, TFP growth was very strong both in the 1920s and the 1930s, at 1.7% and 1.9% per year, respectively – well ahead of anything seen in the last 40 years. Regardless, even though the 1930s saw the fastest TFP growth in the private domestic economy before WWII, it was not the most progressive decade of the whole 20th century in terms of TFP growth. Both 1948-60 and 1960-73 were superior at 2.0% and 2.2% per year, respectively

Pointers from Mark Thoma for both.

Keep in mind that in (2), they are starting with output per worker in the aggregate economy, and certainly there are problems measuring the numerator. Then you adjust for capital per worker, and that raises another measurement challenge. Then, in order to calculate you take a percentage change, which amplifies measurement error. Then, to compare growth rates across time periods, you take the difference in percentage changes, which amplifies measurement error yet further. I’m not criticizing these specific results, but just raising a general caution.

Deirdre McCloskey at the AEA

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She writes,

The second element, universal dignity—the social honoring of all people—was necessary in the long run, to encourage people to enter new trades and to protect their economic liberty to do so. The testing counter-case is European Jewry down to 1945, gradually liberated to have a go in Holland in the seventeenth century and Britain in the eighteenth century and Germany and the rest later. Legally speaking, from Ireland to the Austrian Empire by 1900 any Jew could enter any profession, take up any innovative idea. But in many parts of Europe he was never granted the other, sociological half of the encouragement to betterment, the dignity that protects the liberty.

Read the whole essay. Pointer from Don Boudreaux.

Another excerpt, from earlier in the piece:

North, Wallis, and Weingast treat only England, France, and the USA, which obscures the ubiquity of what they call “doorstep conditions”—the rule of law applied even to elites, perpetually lived institutions, and consolidation of the state’s monopoly of violence. Such conditions characterize scores of societies, from ancient Israel to the Roman Republic, Song China, and Tokugawa Japan, none of which experienced a Great Enrichment.

And much later in the piece:

The important “institutions” were ideas, words, rhetoric, ideology. And these did change on the eve of the Great Enrichment. What changed circa 1700 was a climate of persuasion, which led promptly to the amazing reflection, entrepreneurship, and pluralism called the modern world.

My Review of Scott Sumner’s The Midas Paradox

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The book offers a historical interpretation of the Great Depression as a monetary phenomenon. My review is here. This paragraph may be a bit terse:

The price index that Sumner uses is the Wholesale Price Index. This is a volatile index that largely excludes finished goods and instead tracks goods that are intermediate inputs to other producers. From the standpoint of those final-goods producers, an increase in the WPI indicates not a positive demand shock but an adverse supply shock. Sumner did not succeed in convincing me that the causality runs from increases (decreases) in the WPI to increases (decreases) in output, rather than the other way around.

Suppose that the idea is that when monetary policy is expansionary, prices for finished goods go up and nominal wages remain sticky. Then producers will increase output, and this will raise the demand for goods that are intermediate inputs. The price of intermediate goods could rise by a much higher percentage than the price of finished goods, provided that intermediate goods are not a large share of the cost of producing finished goods and provided that the supply of intermediate goods is somewhat inelastic.

Using this story, the Wholesale Price Index is not really the “P” that goes into the real wage rate, W/P. Instead, it is an indicator that production is rising (or is expected to rise). We still have to take in on faith that a decrease in W/P is what caused the rise (or expected rise) in production.