When I read Peter Turchin’s Ultrasociety, I thought that it covered some of the same ground and had some similar ideas as Douglass North’s Structure and Change in Economic History, which appeared in 1981. In fact, it is hard to find anything in Turchin’s book that supercedes North, notwithstanding 35 more years of anthropological research and the new discipline of cultural evolution. It seems that North’s intuition was pretty sound.
Continue reading
Category Archives: Economic History
A Commenter Reviews The Midas Paradox
Any proposed answer to the question of “What really caused the Great Depression” is inevitably pregnant with policy implications, and so is unavoidably incredibly politically charged. That’s one of the reasons so many top economists are so keen on studying it. Big names like Keynes, Hayek, Friedman, and Bernanke, just to name a few.
[more below the fold] Continue reading
The Midas Paradox So Far
That is Scott Sumner’s magnum opus on the Great Depression. I am part way through it. The importance of the book cannot be overstated. Here, I want to mention two problems I am having.
1. The structure of the book. It is difficult to get through. He constantly interrupts his own interpretive narrative to discuss other economists’ narratives. I would have rather seen the discussions of other narratives cordoned off into appendices.
2. Sumner wants to rely on stock market movements as indicators of the effect of monetary policy on the economy. I am never a fan of trying to interpret the stock market, and this time period seems particularly problematic. Robert Shiller’s famous argument against the efficient markets hypothesis is the “excess volatility” that he found in stock prices. The period that Sumner is describing has volatility that goes far beyond even what caused Shiller to reject market efficiency. Reading Sumner’s narrative, there seem to be a lot of days where the market goes up or down by 4 percent, 5 percent, or more. In today’s terms, that would mean the Dow often gaining or losing 700 to 850 points in a day. I am inclined to dismiss 90 percent of these movements as irrational (I would do the same for short-term movements in the market now). I understand that Sumner is looking for indications that the economy is responding to monetary policy, as opposed to some other factor, but I find it more persuasive when he cites medium-term trends in commodity prices than when he cites short-term stock price behavior.
Scott Sumner’s Theory of Hysteresis
In The Midas Paradox, he writes,
if depressions do encourage statist policy interventions, then deflationary policies may impose costs that are much larger that [sic] those predicted by natural rate models of the business cycle.
Recently, Blanchard and Summers have argued that demand shocks cause supply shocks in the private sector. That is, if you have a recession, the economy’s potential output falls. Sumner’s view is that demand shocks cause governments to come to power that implement bad supply-side policies. Examples he gives include Roosevelt’s NRA and Argentina’s left-wing government of the early 2000’s. Perhaps the U.S. after 2008 will turn out to be another example.
Of course, I am not as ready as Sumner to go with the AS-AD paradigm.
Scott Sumner on Targets, Instruments, and Indicators
When I was in graduate school, Benjamin Friedman’s paper on targets, instruments, and indicators of monetary policy (appears to be gated) was assigned in several courses. So I think of it as a classic, but mine may be an idiosyncratic perspective.
A target is a policy goal: Unemployment. Inflation. Nominal GDP.
An instrument is something that the Fed controls. The three old-fashioned textbook examples are the amount of reserves (or reserves plus currency), the required reserve ratio, and the discount rate. More recently, the Fed funds rate is the instrument that economists focused on. Even more recently, there is the size of the Fed’s balance sheet.
An indicator is something that the Fed can watch to see whether the economy is moving toward or away from its target. There are plenty of such indicators: private forecasts of NGDP, high-frequency data, such as retail sales figures, etc.
As I see it, one of Scott Sumner’s objectives, in his blog and in his new book The Midas Paradox which I have just started reading, is to get people to pay less attention to certain indicators of monetary policy. In particular, interest rates and the quantity of money are not reliable indicators, in his view. He wishes that policy makers would forget about such indicators. They should instead turn instruments in order to hit the target.
For example, in recent years, he has said that all you need to know to say that money has been too tight is to look at the growth rate of NGDP. It dropped way below trend, which tells you that monetary policy should have been looser. If you insist on having an indicator, you should use the forecast for NGDP. But even if you respond only to NGDP after it is reported, you should have had a looser policy.
In the 1930s, we did not have a lot of the data that we have today, including NGDP. Sumner regards the Wholesale Price Index as the best target variable available. As I understand it (Scott, if you read this, please correct me), he thinks that the instrument that mattered most at the time was the ratio of gold reserves to currency. When this is high, government is hoarding gold and tightening monetary policy. When this is low, government is dis-hoarding gold and loosening monetary policy.
The private sector also can hoard gold, and this has the same effect as a monetary tightening. If I understand Scott’s thinking correctly, when the private sector does more hoarding, if the central bank wants to hit its nominal target it will have to do some offsetting dis-hoarding.
My own view is that the connection between instruments and targets is very loose. In the current environment, think of the Fed’s instrument as M0, which is currency plus reserves. Think of the money used for transactions as Mt, which is some complex (and variable) weighted average of currency, checking accounts, money market funds, credit lines, frequent-flyer miles, you-name-it. Because these two definitions of money are so different, the Fed can turn its dial a long way without any result, and then when it starts to get results they could end up all over the map.
This is also my instinct for the 1930s, but to be fair I need to read through Sumner’s book before I make up my mind.
Scott Sumner on the Great Depression
His book will be out soon, and no doubt it will break into my earlier list. Meanwhile, he has posted a really useful flowchart summary.
My own views.
All recession are adjustment problems. The Great Depression’s adjustment problems included:
1. Massive reconfiguration of agriculture because of tractors, trucking, and refrigeration. This displaced farm laborers.
2. Massive reconfiguration of manufacturing, as the small electric motor changed many production processes. As Amy Sue Bix points out, as of 1920 there were still men rolling cigars and making light bulbs by blowing glass. Machines could to those jobs better.
3. Sudden changes in asset prices, as a land bubble burst in the late 1920s and a stock market bubble burst in 1929.
4. The rise of fascism/socialism in Europe and a fear of something similar here–regime uncertainty, to use Robert Higgs’ term.
5. Counterproductive New Deal initiatives, such as destroying pigs and organizing industry into cartels (the NRA).
6. Loss of trust in financial intermediaries.
7. Increase in international protectionism.
History of U.S. Financial Crises
Once the Great Depression is thrown out as a statistical outlier, we observe no significant change in the frequency, duration, or magnitude of recessions between the period before and the period after that unique downturn. Given that the Great Depression witnessed the initiation of extensive government policies to alleviate depressions and that the Federal Reserve had been created fifteen years earlier explicitly to prevent such crises, this overall historical continuity with a single exception indicates that government intervention and central banking has done little, if anything, to dampen the business cycle.
The history of the Federal Reserve and of attempts to regulate the financial system and control the macroeconomy offers a fascinating study in the relationship of intentions to outcomes.
Suppose that you want to describe history assuming a strong correlation between intentions and outcomes. Then you want to say that:
(a) the creation of the Federal Reserve System helped to stabilize the financial system, since that was its intent.
(b) Franklin Roosevelt’s economic policies ended the Great Depression, since that was their intent
(c) the Fed’s response to the financial crisis prevented another Great Depression, since that was its intent.
However, as Hummel’s analysis shows, (a) appears to be false, although few economists seem to want to make a systematic study of it. (b) seems clearly false, as the data show that the economy was still in terrible shape until at least 1940. (c) is viewed by most economists as true, but it would not surprise me to see that opinion shift in the future.
How Bad was the Victorian Era?
Not bad at all, if you believe this historian.
My husband and I have slowly, gradually worked to base our lives around historical artifacts and ideals because — quite frankly — we love living this way. People assume the hard part of our lifestyle comes from the life itself, but using Victorian items every day brings us great joy and fulfillment. The truly hard part is dealing with other people’s reactions.
1. The irony of this story appearing on Vox.
2. I really wanted to tie this in with Vickies and Thetes, but I leave that to the reader.
3. Thanks to Michael Gibson for the pointer.
Ancient Trade and Trust
1. From Adam Davidson in the NYT magazine:
At the city gate, Assur-idi ran into a younger acquaintance, Sharrum-Adad, who said he was heading on the same journey. He offered to take the older man’s donkeys with him and ship the profits back. The two struck a hurried agreement and wrote it up, though they forgot to record some details. Later, Sharrum-Adad claimed he never knew how many textiles he had been given.
Pointer from Tyler Cowen.
This apparently took place in the 19th century, BC. Long-time readers will know that I have taken the view that archaelogists are finding evidence of plunder and calling it evidence of trade. But this example (read the whole story) shows that I am wrong about that.
The main focus of the article is the gravity model of trade, which says that trade between any two entities (cities, countries) is positively related to their size in terms of population and negatively related to the distance between them.
2. Josiah Ober says,
The key to unlocking the puzzling success of the Greek city-state ecology is economic specialization and exchange. Specialization was based on developing and exploiting a local advantage, relative to other producers, in the production of some valued good or service. . .
the costs of transactions were driven down by continuous institutional innovations, notably by the development and rapid spread of silver coinage as a reliable exchange medium; the dissemination of common standards for weights and measures; the creation of market regulations and officials to enforce them; and increasingly sophisticated systems of law and legal mechanisms for dispute resolution.
The whole piece is interesting.
Joseph Stiglitz Tells a PSST Story
For the past several years, Bruce Greenwald and I have been engaged in research on an alternative theory of the Depression—and an alternative analysis of what is ailing the economy today. This explanation sees the financial crisis of the 1930s as a consequence not so much of a financial implosion but of the economy’s underlying weakness. The breakdown of the banking system didn’t culminate until 1933, long after the Depression began and long after unemployment had started to soar. By 1931 unemployment was already around 16 percent, and it reached 23 percent in 1932. Shantytown “Hoovervilles” were springing up everywhere. The underlying cause was a structural change in the real economy: the widespread decline in agricultural prices and incomes, caused by what is ordinarily a “good thing”—greater productivity.
At the beginning of the Depression, more than a fifth of all Americans worked on farms. Between 1929 and 1932, these people saw their incomes cut by somewhere between one-third and two-thirds, compounding problems that farmers had faced for years. Agriculture had been a victim of its own success. In 1900, it took a large portion of the U.S. population to produce enough food for the country as a whole. Then came a revolution in agriculture that would gain pace throughout the century—better seeds, better fertilizer, better farming practices, along with widespread mechanization. Today, 2 percent of Americans produce more food than we can consume.
I did not notice this article when it first came out. Instead, I was motivated to look for it when I saw that Stiglitz’s new book is a collection of reprinted articles. I looked for this article because of what I found in David Rotman’s article in Technology Review,
In his new book, The Great Divide, the Columbia University economist Joseph Stiglitz suggests that the Great Depression, too, can be traced to technological change: he says its underlying cause was not, as is typically argued, disastrous government financial policies and a broken banking system but the shift from an agricultural economy to a manufacturing one. Stiglitz describes how the advent of mechanization and improved farming practices quickly transformed the United States from a country that needed many farmers to one that needed relatively few. It took the manufacturing boom fueled by World War II to finally help workers through the transition. Today, writes Stiglitz, we’re caught in another painful transition, from a manufacturing economy to a service-based one.
This is a PSST story. However, unlike me, Stiglitz thinks that more government spending is a solution for unemployment caused by structural change. Put people to work producing useless munitions, and next thing you know the structural problem is solved. Instead, my view is that between 1929 and 1946 a whole lot of workers with obsolete skills (not just in farming–some types of manufacturing were disappearing, also) aged out of the labor force. The workers that entered the labor force were better educated, and they ended up working the expanding white-collar sector.
I think that the main contribution of World War II was to put people in motion. Soldiers who had gone overseas did not go back to places where there were no jobs. Instead, they went to where there was opportunity. Women and African-Americans were more mobile during the war than they had been previously.