Category Archives: Economic History

Paging James Bennett and Michael Lotus

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Ola Ollson and Christopher Paik write,

We outline an agricultural origins-model of cultural divergence where we claim that the advent of farming in a core region was characterized by collectivist values and eventually triggered the out-migration of individualistic farmers towards more and more peripheral areas. This migration pattern caused the initial cultural divergence, which remained persistent over generations. The key mechanism is demonstrated in an extended Malthusian growth model that explicitly models cultural dynamics and a migration choice for individualistic farmers. Using detailed data on the date of adoption of Neolithic agriculture among Western regions and countries, the empirical findings show that the regions which adopted agriculture early also value obedience more and feel less in control of their lives. They have also had very little experience of democracy during the last century. The findings add to the literature by suggesting the possibility of extremely long lasting norms and beliefs infuencing today’s socioeconomic outcomes.

Pointer from Tyler Cowen.

Larry White on Free Banking History

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His final sentence:

Central banks primarily arose, directly or indirectly, from legislation that created privileges to promote the fiscal interests of the state or the rent-seeking interests of privileged bankers, not from market forces.

Pointer from Mark Thoma (!).

I think that one could write essentially the same sentence to explain quantitative easing.

The Great Depression as a Coordination Failure

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In Fear Itself, Ira Katznelson shows how many intellectuals yearned for a planned economy, but without the ugly police-state repression of Fascist Italy or Communist Russia. As you know, I sense that Katznelson himself seems to still yearn for government oversight of the economy. In fact, Katznelson quote explicitly expresses disappointment that planning was superceded by what he called the “fiscal policy” approach (meaning Keynesian economics). Of course, I think that central planning is not the answer.

Katznelson disparages the Keynesians (and the monetarists) who came up with the aggregate-demand theory of the Depression. He clearly prefers the pre-Keynesian theory that the Depression was a breakdown of the capitalist system.

Here’s the thing. I agree with Katznelson.

The PSST story would look at the Depression as a coordination failure. The market price system, which is supposed to serve as a decentralized planning apparatus, screwed up. Old patterns of specialization and trade became unsustainable, and for a long time the market could not figure out new, sustainable ones.

The modern macroeconomic view is that the Depression was caused by a shortfall in aggregate demand, as opposed to a breakdown of the capitalist system. Instead, I prefer the pre-Keynesian diagnosis, although I do not believe that government officials could have done better by taking over more of the planning. To the extent that they attempted central planning through the NRA and various other New Deal initiatives, the results were certainly not good.

Ira Katznelson is this respected?

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I just finished Fear Itself, his book on the Roosevelt-Truman years. My final reaction was, “Well written, interesting perspective, looks at political economy with about as much sophistication as Occupy Wall Street.” I looked him up to see if he had any connection to the Occupy movement, figuring he might be the sort of fringe professor who would get into it.

Boy, was I off. He is a major force in the academic world. Past President of the American Political Science Association. Current head of the Social Science Research Council. Fear Itself was recently awarded the Bancroft Prize.

I keep forgetting that it is people whose views of political economy resemble mine who are on the fringe in academia.

As for my disagreements with Katznelson, I barely know where to start. He acknowledges the consensus that Roosevelt’s National Recovery Act was a failure, but he has no idea why. He seems to think that it would have worked had it been better executed.

The view of most economists is that the last thing the American economy needed in the Depression was government-organized industry cartels, which is what the NRA was all about. In Randall Parker’s book interviewing economists on the Great Depression, even James Tobin said that Roosevelt was “lucky” that the Supreme Court invalidated the NRA. Of course, Tobin is a Keynesian, and Keynes is too far to the right for Katznelson, who is very sorry that “fiscal policy” took the place of “planning” as the main tool of government for managing the economy.

I found the book valuable. Actually better than any of the flawed books of 2014 (it was published in 2013). I plan to write a longer review, which will focus on Katznelson’s analysis of the politics of the period.

But right now I am sitting here dumbfounded that someone can attain such lofty professional status and be so clearly ignorant of Public Choice theory or the Knowledge Problem.

One possibility is that everyone is intellectually isolated nowadays. Everybody stays within their own bubble. But I doubt that. Conservatives and libertarians did not ignore Rawls. They did not ignore Piketty.

Instead, I think this reflects the ease with which someone on the left can obtain high status in academia, and the corresponding difficulty for those on the right. If you’re on the right, you have to demonstrate awareness of important left-wing academic ideas, or you will be will be widely denounced as an ignoramus. But the converse is not true. I would bet that I am the first person to dare to suggest that Katznelson suffers from ignorance.

Why Did the South Not Converge?

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From Ira Katzelson’s Fear Itself,

For even as industrialization was proceeding elsewhere, the South remained overwhelmingly rural and poor, with depleted land, a lquasi-feudal tenure system based on debt and fear, and many bankruptcies and foreclosures. The New Deal thus was a boon for a hardscrabble region that faced many barriers to economic development. These included a poorly educated and low-skilled white and black population, inferior roads, the outmigration of ambitious workers, a shortage of local investment capital, fewer native mineral resources than other regions, and a paucity of industrial research facilities. The South also experienced high freight rates, high tariffs, low commodity prices, and patterns of ownership that placed the control of financial, mining, manufacturing, transportation, and communications corporations mainly in the hands of northeastern capitalists, a pattern many southern commentators thought to be colonial in nature.

Some thoughts:

1. In my book with Nick Schulz, we emphasize that countries differ mostly in terms of intangible wealth. We focus on institutions (think of North Korea vs. South Korea). The main institutional difference that the South had was its Jim Crow laws. Were they enough to keep the region improverished?

2. Remember that there are many ways for regions to converge within the U.S. People can move to where incomes are higher. Capital can move to take advantage of cheaper labor. Why did these mechanisms not work? Again, race may have played a factor. Until after the second World War, the poorest part of the southern population, namely poor African Americans, was discouraged from moving north, because racism also existed in the north. By the same token, a large part of the southern labor supply that might otherwise have attracted northern capitalists to build factories was African American, and it would have been hard to find whites willing to work with blacks doing similar jobs or under black supervisors.

3. Divergence remains a feature of the American economy. Both within and across metropolitan areas, there are large income differences. Again, this poses the questioh of why there is not more movement of people to high-income locales and/or more movement of firms to low-wage areas.

4. Katzelson’s point is that politicians of the south actively sought redistribution, and this factored into their support for New Deal legislation.

5. Bryan Caplan offers a theory of coincidental advantages that may or may not be a convincing explanation for lack of convergence.

We are Re-living 2003

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Describing the latest Fed pronouncement, David Andolfatto writes,

how new are these buzzwords? They’re not new at all. Consider this from the December 09, 2003 FOMC statement

I have said before that the economy resembles 2003. Output has recovered more strongly than employment. Long-term bond rates are puzzlingly low. House prices have been rising (quite rapidly near us in suburban Maryland). Policy makers are trying to loosen mortgage credit.

UPDATE: See also Mark Thoma/Tim Duy.

Technological Obsolescence of Labor

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Timothy Taylor writes,

when I run into people who are concerned that technology is about to decimate U.S. jobs, I sometimes bring up the 1964 report. The usual response is to dismiss the 1964 experience very quickly, on the grounds that the current combination of information and communications technology, along with advanced in robotics, represent a totally different situation than in 1964. It’s of course true that modern technologies differ from those of a half-century ago, but that isn’t the issue. The issue is how an economy and a workforce makes a transition when new technologies arrive. It is a fact that technological shocks have been happening for decades, and that the U.S. economy has been adapting to them. The adaptations have not involved a steadily rising upward trend of unemployment over the decades, but they have involved the dislocations of industries falling and rising in different locations, and a continual pressure for workers to have higher skill levels.

Suppose we make some simple assumptions:

1. Leisure is a normal good.
2. Skills are heterogeneous and adapt slowly to changes in technology.

The prediction I would make is that we would see a lot more leisure. For those whose skill adaptation is adequate, that leisure will take the form of earlier retirement, later entry into the work force, or shorter hours. For those whose skill adaptation is inadequate, that leisure will show up as unemployment or reluctant withdrawal from the labor force.

I think that if you look only at males in isolation, you will see this in the data. That is, men are working much less than they used to. For some men, this leisure is very welcome, but for others it is not. In that sense, I think that we should look at the fears of the early 1960s not as quaint errors but instead as fairly well borne out.

For women, the story since the 1960s is different. In the economy as a whole, the share of labor devoted to preparing food, washing clothes, and cleaning house has gone down. Also, a higher share of the remaining work in these areas is coming from the market, via restaurants and cleaning services, rather than from unpaid female labor. The upshot is that, from the 1960s to about 2000, we saw a continuation of the trend for women to increase their share of market work and reduce their non-market labor. So, while men were increasing their leisure, women were increasing their market work. Combining men and women, you would not see a decline in market work.

It seems that around 2000, the trend for more market work by women reached its peak, making the trend toward technological unemployment more visible. From now on, what was happening to men before will be what happens to the total labor force. That is, leisure will go up, and some of it will be less than voluntary.

I might suggest also that the distribution of leisure is becoming increasingly distorted by the welfare state. Some people have too much leisure, in part because implicit tax rates for low-skilled workers are high, and in part because we over-subsidize leisure among healthy seniors. Some people have less leisure than they might otherwise enjoy, in part because they are working to support those with too much leisure.

Boudreaux on McCloskey

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He writes,

Until the 17th century, those who earned their living through trade were the Rodney Dangerfields of their eras: they got no respect. Merchants and other people operating on the supply side of commercial activities and transactions were tolerated. But they were viewed and spoken of with contempt. Unlike warriors who dirtied their hands honorably (namely, with blood), traders dirtied their hands dishonorably (namely, with profit). Unlike the nobility who got their riches honorably (namely, by idly collecting land rents), merchants got their riches dishonorably (namely, by actively trading). Unlike the clergy who won their rewards honorably (namely, by pondering the eternal), the bourgeoisie won their rewards dishonorably (namely, by responding to what Hayek later called “the particular circumstances of time and place”).

In the same symposium, Joel Mokyr writes,

Corruption is the institutional dog that did not bark. It is perfectly reasonable to think of a hypothetical world in which predatory rent-seeking by a powerful elite could have expropriated the profits of innovative entrepreneurs in the Industrial Revolution, as was traditionally done in the medieval world. Instead, the British aristocrats who ruled the country in the 18th century let the entrepreneurs have their way and pocketed the capital gains on their real estate holdings and the interest on their railway bonds. Organizations such as the rent-seeking monopolies, set up in the age of mercantilism (think of the East India Company or the Bank of England), were either dismantled or turned into public institutions. Slowly but certainly rent-seeking institutions were weakened. By 1850 or so the country was as free of it as any nation had the right to hope for.

How then to think of the “ideas vs. institutions” debate? Oddly enough McCloskey and Acemoglu-Robinson both seem committed to a “one-or-the-other” mode. But it is not so. Institutions rest on beliefs. If we have rules against the sale of narcotics, it is because someone in power believes that such drugs are socially bad. When those beliefs change, the institutions (hopefully) adapt. Adaptiveness requires meta-institutions that can change the rules when beliefs and/or circumstances change. Britain’s great success between 1750 and 1914 rested on the existence of such meta-institutions. When needed, Parliament set up a committee that researched and investigated matters ad nauseam and then changed the rules. Slowly, and perhaps not always quite perfectly, British formal institutions adapted. But the same was true for private-order institutions: the rather sudden rise of country banks in the second half of the 18th century illustrates the high degree of adaptiveness of private-order British institutions

What I’m Reading

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I finished Gregory Clark’s new book. I put it in the must-read category. I hope to publish a review on line in the next few months.

I am now reading Fragile by Design by Charles Calomiris and Stephen Haber. I posted a few months ago on an essay they wrote based on the book. I also attended yesterday an “econtalk live,” where Russ Roberts interviewed the authors in front of live audience for a forthcoming podcast. You might look forward to listening–the authors are very articulate and they speak colorfully, e.g. describing the United States as being “founded by troublemakers” who achieved independence through violence, as opposed to the more boring Canadians.

I think it is an outstanding book, although in my opinion it is marred by their focus on CRA lending as a cause of the recent financial crisis. This is a flaw because (a) they might be wrong and (b) even if they are right, they will turn off many potential readers who might otherwise find much to appreciate in the book. Everyone, regardless of ideology, should read the book. It offers a lot of food for thought.

I am only part-way through it. The story as far as I can tell is this:

1. There is a lot of overlap between government and banking. Governments, particularly as territories coalesced into nation states, needed to raise funds for speculative enterprises, such as wars and trading empires. Banks need to enforce contracts, e.g., by taking possession of collateral in the case of a defaulted loan. Government needs the banks, and the banks need government.

2. If the rulers are too powerful, they may not be able to credibly commit to leaving banks assets alone, so it may be hard for banks to form. But if the government is not powerful enough, it cannot credibly commit to enforcing debt contracts, so that it may be hard for banks to form.

3. Think of democracies as leaning either toward liberal or populist. By liberal, the authors mean Madisonian in design, to curb power in all forms. By populist, the authors mean responsive to the will of popular coalitions of what Madison called factions.

4. If you are lucky (as in Canada), your banking policies are grounded in a liberal version of democracy, meaning that the popular will is checked, and regulation serves to implement a stable banking system. If you are unlucky (as in the U.S.), your banking policies are grounded in the populist version of democracy. Banking policy reflects a combination of debtor-friendly interventionism and regulations that favor rent-seeking coalitions who shift burdens to taxpayers. The result is an unstable system.

I may not be stating point 4 in the most persuasive way. I am not yet persuaded by it. In fact, I think libertarians will be at least as troubled as progressives are by some of the theses that the authors promulgate.

Forgotten Macroeconomic History

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From Paul Volcker, interviewed by Martin Feldstein in the Journal of Economic Perspectives.

[Early in 1980, President] Carter was obviously under pressure, so he triggered a provision of law that
permitted the Federal Reserve to put on credit controls…We said, “Okay, you’re going to have a reserve requirement on credit cards—if credit cards exceed past peaks, you would have a reserve requirement.” We did that knowing, we’re now in March, the peak in credit card use comes in November and December. We were way below it so there was no possibility that this was going to become a factor for some time…The economy at that point fell like a rock. People were cutting up credit cards, sending in the pieces to the President as their patriotic duty. Mobile home and automobile sales dropped within the space of a week or so. The money supply, we didn’t know why the money supply was dropping, but all of the sudden the money supply was down 3 percent in a week or something…Well, it was a recession alright, the economy went down, but it was an artificial recession. As soon as we took off the credit controls in June, the economy began expanding again

Credit rationing seems to be quite powerful. Recall that before the late 1980s, interest-rate regulations ensured that when interest-rates rose, the depository institutions would find themselves without money to lend for mortgages, and that was usually enough to bring about a recession.