@BAllanHansen

Thursday, October 18, 2018

Accounting for Capitalism


I read Michael Zakim’s new book Accounting for Capitalism: The world the clerks made last week. I saw Tyler Cowen’s brief review on Marginal Revolution, and Cowen included the following excerpt from the book

A single block fronting Wall Street in 1850 was thus home to seventeen separate banking firms, as well as fifty-seven law offices, twenty-one brokerage houses, eleven insurance companies, and an assortment of notaries, agents, importers, commission merchants, and, of course, stationers.  A rental market for office “suites” developed apace “fitted up with gas and every other convenience,” which also included newly invented “acoustic tubes” that allowed managing partners to communicate with porters in the basement and clerks in the salesroom without ever having to leave their desks…
All this office activity spurred a flurry of technological spillovers that included single standing desks and double-counter desks, sitting desks featuring nine or, alternately, fifteen pigeonholes, and drawers that could or could not be locked.  “Office chairs capable of swiveling and tilting became available as well, together with less costly “counting house stools” that lacked any upholstery.  Paperweights, check cutters, pen wipers (the woolen variety being preferable to silk or cotton, which tended to leave fibers on the nib), pencil sharpeners, rulers, copying brushes, dampening bowls, blotting paper (less important for absorbing excess ink than for protecting the page from soiled hands), wastepaper baskets, sealing wax (including small sticks coated with a combustible material ignited by friction and designed to be discarded after a single use), seal presses, paper fasteners, letter clips (for holding checks while entering them into the daybook), writing pads, billhead and envelope cases, business cards, receiving boxes for papers and letters, various trays (for storing pins, wafers, pencils, and pens), and “counting room calendars” spanning twelve- or sixteen-month cycles — all became standard business tools.  So did the expanding inventory of “square inkstands,” “library inkstands,” and “banker inkstands” designed with narrow necks which prevented evaporation and shallow bodies that kept the upper part of the pen from becoming covered in ink, thus avoiding blackened fingers and smudged documents.

He then added thatThere is then a whole other paragraph about the different kinds of paper that developed and their importance for clerical work.  This is perhaps the most thorough book I know on the importance of “small” innovations, and it is also a useful book on the history of accounting.”

The impact of small technological changes and the history of accounting, however, are not the central concerns of the book. Zakim’s book is more about the subtitle “the world the clerks made.” It is business history, but it is more on the cultural history part of the business history spectrum than the technological, accounting, or economic history parts of the business history spectrum. Zakim is not trying to explain changes in technology or accounting, their spread, or their impact, or even changes in the number of clerks and the functions they served. Instead, he is interested in the changes in thepeople perceived the economy and their place in it. Those are interesting questions, nevertheless, I found the book frustrating.

Capital and capitalism are words that have multiple definitions, but Zakim doesn’t define how he is using them, and their meaning is not made clear by the context. Often the use does not seem consistent with any of the common uses of the terms.
Here are some of Zakim’s statements about capitalism:

“Anyone could become a capitalist, Americans were told, a possibility that acted as a “spur to exertion to the very news boys in our streets,” as did the popular intelligence that the great majority of the country’s businessmen had “commenced life behind a desk or the counter.” This did not mean, however, that everyone actually became a capitalist, It did mean, however, that everyone became capital---or what we so casually refer to as “human capital” today---rendering their own lives the subject of utility and enterprise.” (Zakim page 7)

“The individual became an asset worthy of the highest credit rating in a cash fraternity born of the axioms of purchasability and personhood. He became human capital.” (Zakim page 70)

“This perpetuum mobile of life under capital---of dialectics at a standstill”---continues to induce bouts of chronic fatigue and irritable bowels, panicked concerns with one’s diet fed by a vast catechism of self help literature, and the body mass ratios of exercise routines including performances of manual labor at the local cross fit gym. Surely too, the treadmill desks of today are worthy successors to Dr. Halsted’s equestrian exercise chair of 1846. Both mediate between our humanity and the exigencies of the market, seeking to ameliorate the fraught relationship between “Mammon and Man” that proves to be the common denominator of capitalism’s reinvention of itself.” (Zakim page 194)

“Pen and paper already engendered such a virtual reality, which was the condition for capitals transmigrations from place to place, and form to form, passing between its merchant, industrial and financial incarnations, and then back again, imbuing the human imagination with the same values of fungibility. The history of capitalism is not, then, about the economic origins of society, but about the expressions that economy assumes in society, about how capital acquired consciousness.” Economists call this process “cognitive regulatory capture.” (Zakim page 197)

Capital and capitalism appear frequently, but Zakim does not say what he thinks those words mean, and it is not clear how his use fits with common uses of the terms. Within economics capital is often used to mean two different things. The most frequent use is as a factor of production. Undergraduate students are taught that output is a function of land, labor, capital and technology. In this context capital is anything that has been produced to enable more production in the future. It includes factories, office buildings, and equipment. It also includes things like roads, bridges, and ports. In addition, it includes knowledge and skills that people have obtained that enable them to be more productive, which is referred to as human capital. I’m pretty sure Zakim’s use of “human capital” is not the same as economists.  Capital is also used, especially in discussions of finance and banking, to refer to the stake of the owners of a business. For instance, after the last financial crisis there was a lot of discussion about increasing capital requirements at banks to discourage excessive risk taking and provide a cushion in case some loans or investments go bad.The Marxist view of capital, as best I recall, is distinct from but related to both of these definitions of capital. I can't tell you what capital is for Zakim, only that it is important.

The book alternates between the sort of concrete descriptions that Cowen highlighted and the less concrete statements about capitalism, like those I have included here. Consequently, I found the book interesting but somewhat frustrating. It is not clear to me what it means to say that “capital acquired consciousness.” I don’t think it is what economists call cognitive regulatory capture, but it may be similar to it.

If you are interested in learning about the evolution of information technology and its impact of business and the economy I would suggest that you might take a look at JoAnne Yates Control Through Communication: The Rise of System in American Management , Margaret Levenstein Accounting for Growth: Information Systems and the Creation of the Large Corporation, or Josh Lauer Creditworthy: A History of Consumer Surveillance and Financial Identity in America. You may also find some of the chapters in Daniel Raff and Phil Scranton (editors) The Emergence of Routines: Entrepreneurship, Organization and Business History interesting as well.

Wednesday, September 26, 2018

Henry Clay, Edward Baptist, and the Whipping Machine


Along with the term “pushing system” that Baptist invented and attributed to slaves and his fictional estimate of the economic impact of slave produced cotton, the “whipping machine” has been one of the most frequently cited stories from The Half Has Never Been Told. Foner, for instance, explained in his New York Times review “Each slave was assigned a daily picking quota, which increased steadily over time. Baptist, who feels that historians too often employ circumlocutions that obscure the horrors of slavery, prefers to call it “the ‘whipping-machine’ system.” I saw it mentioned again recently and decided to look at the actual slave narrative that Baptist refers to. By this time I should not have been surprised at what I found. Nevertheless, I was.

Here is Baptist’s description




Henry Clay seems to be an almost perfect representative for Baptist’s claims about slaves being moved to the cotton frontier of the Southwest, where owners invented new ways to drive them harder.

Henry Clay’s slave narrative is in WPA Oklahoma Slave Narratives. Here are the parts relevant to Baptist’s interpretation.








In both versions Clay is born in North Carolina and then sold and moved to Louisiana, and both include Clay’s description of a whipping machine. But the whipping machine did not drive him to pick cotton faster in Louisiana because it was not in Louisiana and he did not pick cotton in Louisiana. In Clay’s narrative, the whipping machine was owned by his original master in North Carolina, and Clay claims that he did not use it. According to Clay threats were common on the North Carolina plantation but whipping was not. When his new master took him to Louisiana he first cleared land and then was rented to a ship captain. Eventually, he was taken to Oklahoma when he was inherited by the son of the man that took him to Louisiana. Did the whipping machine actually exist? Baptist suggests not. He thinks Clay was using it as a metaphorical argument that  "every cotton labor camp cleared out of the southwestern woods used torture as its central technology." Well, I don't think he was doing that since he placed it in North Carolina. Moreover, I don't see anything in the narrative suggesting that he was interested in making metaphorical arguments. If I had to choose between real and metaphorical I would probably go with real. The description is very specific and it is plausible. It sounds like a large spinning wheel with straps attached to the wheel. I have no guess as to whether it would have been functional or used. In the absence of corroborating evidence it is difficult to assess. The lack of corroborating evidence suggests that if it existed it was rare, if not unique.

The bottom line is that Henry Clay's story about the whipping machine is not the one that Baptist tells. One has to wonder at his point if there anything in the book that is faithful to the sources that it is supposedly based on? The case of the whipping machine reinforces the fact that criticism of Baptist has nothing to do with different methods of historians and economists; it has everything to do with Baptist's failure to meet the standards by which historians have traditionally evaluated each others work.

Wednesday, September 5, 2018

That's Just Econ 101 Part 2


The other day I said that when someone says something is just Econ 101 you can be confident it is probably not Econ 101. I have a couple more examples now. Simon Johnson writes about Saving Capitalism from Economics 101. He writes that

All across the United States, students are settling into college – and coming to grips with “Econ 101.” This introductory course is typically taught with a broadly reassuring message: if markets are allowed to work, good outcomes – such as productivity growth, increasing wages, and generally shared prosperity – will surely follow.

Unfortunately, as my co-author James Kwak points out in his recent book, Economism: Bad Economics and the Rise of Inequality, Econ 101 is so far from being the whole story that it could actually be considered misleading – at least as a guide to sensible policymaking. Markets can be good, but they are also profoundly susceptible to abusive practices, including by prominent private-sector people. This is not a theoretical concern; it is central to our current policy debates, including important new US legislation that has just been put forward.

One core problem is that market incentives reward self-interested private behavior, without accounting for social benefits or costs. We generally overlook our actions’ spillover effects on others, or “externalities.” To be fair, Econ 101 textbooks do discuss this issue in some contexts, such as pollution, and it is widely accepted that environmental damage needs to be regulated if we are to have clean air, clean water, and limits on other pollutants.

Unfortunately, “widely accepted” does not include by President Donald Trump’s administration, which is busy rolling back environmental protections across a broad range of activities. The New York Times counts 76 rollbacks in progress. The thinking behind this policy is straight out of the first few weeks of Econ 101: get out of the way of the market. As a result, there is a lot more pollution – including more emission of greenhouse gases – in America’s future.

What’s wrong with this?

1.       It is not what is taught in introductory econ courses. I do not know of any textbook that makes the case that if markets are allowed to work good things will surely follow. Mankiw is one of the more politically conservative econ textbook authors. One of his ten principles is that markets are usually a good way to organize economic activity, but it is followed immediately by the principle that government can sometimes improve market outcomes. The one chapter on perfect competition is followed by three chapters on monopoly, oligopoly and monopolistic competition. There are chapters on externalities, public goods and discrimination. If Mankiw isn’t teaching Ayn Randian libertarianism, who is? Stiglitz? Krugman? I don’t think so.
2.       He then notes that this description of ECON 101 isn’t actually Econ 101. Economists do tell students about things like externalities. And that the need for government regulation to protect the environment is “widely accepted.”
3.       If it is not what is taught in Econ 101 what is it? Turns out that it is the views of the Trump administration.
4.       Then Johnson immediately switches back to blaming Econ 101. His argument seems to be “This is what you learn in Econ 101. Okay, its not actually what you learn in Econ 101, but I’m going to keep blaming Econ 101 anyway. His coauthor Kwak uses the same approach in his book.
5.       Blaming the Trump administrations economic policies on Econ 101 is about as accurate as blaming his foreign policy on Introduction to International Affairs courses.

At least this video on Economic Man versus Humanity: a puppet rap battle has cool puppets. I like puppets. Right now, I’m looking at the four marionettes from Prague that hang in my home office.  Her rap, however, is terrible. Oh good lord the verse she makes. It gives a chap the bellyache. She presents one of the most inaccurate interpretations of economic assumptions: that economists assume that people should only care about money and things. You can gain satisfaction from whatever you want: fancy cars, giving to charity, or baking great bread. There is nothing in economics that says you should be making money instead of playing music music, as the puppets apparently want to do. If you enjoy playing music, you should probably play music, but, like any other choice, playing music has a cost.  You must give up something else you could have done with that time and money. Economists don’t say what you should want to do; they just say that, other things equal, if the benefits of doing something goes up people will tend to do it more and if the costs go up people will tend to do it less. And the stuff in the video about the planet being here for our use. That’s not economics. That’s the weird fundamentalism of Ronald Reagan’s secretary of the interior James G. Watt.

People who want to improve economic education need to start with real economics. Not these silly straw man Econ 101s. As I’ve said before, economics needs better critics.

Monday, August 20, 2018

Productive and Unproductive Error


The list of new working papers this morning from nep-his contained one by Richard Langlois, “The Fisher Body Case and Organizational Economics”, which examines the case of Fisher Body. Mary and I also examined the case in our paper “The historian’s craft and economics,” This blog post is both a concurring and dissenting opinion on the Langlois paper.

Fisher Body was an early manufacturer of automobile bodies that merged with General Motors in the 1920s. Both our paper and Langlois paper are, however, less about the story of the merger than they are about the story about the story. The story about the story begins when Klein, Crawford and Alchian published a paper in 1978 that used Fisher Body as an example of vertical integration driven by the holdup problem arising from asset specificity. For non-economists the terms may be unfamiliar, but the intuition is straightforward. The relationship between the automobile manufacturer and the manufacturer of bodies will be most profitable if they make investments that are fitted to each other. For example, the assembly plants are close to the body plants, or the body plants are designed to produce the sort of bodies the automobile company uses. In other words, you have assets, factory and equipment that are specific to a particular use and much less valuable in alternative uses. Hold up is the idea that once such investments have been made one side can try to exploit the other. “We are going to lower the price we pay for your automobile bodies, and you will have to accept it because no one else is going to buy those bodies that are designed for our cars.” That is a really simplified version, but you should get the idea.

In 1988, Klein described this explanation for the merger
“Fisher effectively held up General Motors by adopting a relatively inefficient, highly labor-intensive technology and by refusing to locate body-producing plants adjacent to general Motors assembly plant” (Klein, 1988: 202).

In 1988, Coase began to question this explanation, and he and several other researchers presented considerable evidence that the sort of holdup described by Klein never took place and that the merger was motivated by other concerns. Klein and Coase argued back and forth, and several other people jumped in. Ultimately Klein acknowledged that the hold up he described never took place.
Both Coase and Hansen and Hansen present the case as an example of economists’ failure to give sufficient attention to empirical evidence. Langlois on the other hand sees the entire episode as an example of the process of developing economic knowledge. Here is the conclusion of his paper



I agree with the overall thrust of Langlois argument but disagree with his specific case. I think there are numerous examples of cases where economists have developed explanations that turned out to be incorrect but were important because they generated debates and stimulated research that led to better understanding.

For instance, Doug North’s explanation for economic development in the antebellum period prompted research into agricultural production in the South and industrial development in the North that overturned his explanation and led to a better understanding of antebellum development. I think a similar thing is going on with Pomeranz’s work on the Great Divergence. Academics should not be criticized just for being wrong, especially if it leads to research that improves our understanding of something. 

So what is the difference between North and Pomeranz, on the one hand, and Klein et al, on the other. First, Klein et al simply use Fisher Body to provide a little color to the theory. Their primary objective is not to understand the history of Fisher Body and GM. The work of North and Pomeranz on the other hand was driven by the desire to understand history. Second, North and Pomeranz based their theories on the available evidence, and some of their claims were later challenged by new and better evidence. The initial claim of Klein et al was not based upon the available evidence. There was already evidence in support of a contrary claim and no evidence in support of their claim that Fisher held-up GM. Finally, the responses to North and Pomeranz took us beyond where we were before they wrote. In contrast, the responses to Klein et al largely took us back to where we were before. According to Langlois



The use of Fisher by Klein et al is an example of trying to cram history into a theory rather than using theory to understand history. When I was studying economic history at the LSE in the early ‘80s I became increasingly interested in the use of economic theory in economic history. My advisor, Geoff Jones, told me that theory could be very useful but that I had to be careful not to try to make a historical story fit into a theory. Theory might help guide the search for evidence, but you have to go where the evidence leads you even if that doesn’t fit your theory. And you must tell the story honestly.  Although I went on to get a Ph. D. in economics rather than history, I have always tried to keep Geoff’s advice as a guiding principle. I think Klein et al would have been less likely to follow the path they did if they had been driven by a desire to understand Fisher Body.

Wednesday, August 15, 2018

That's Just Econ 101


The other day my wife and I were talking about how people like to use phrases like “that’s just Econ 101”. Unfortunately, statements that precede that phrase are almost never Econ 101. It’s just whatever the person happens to think. I said that fairy tales should be re-written to include the phrase. “If you don’t make the shoes, elves will do it at night. That’s just Econ 101.” "He spins straw into gold. That's just Econ 101."

Bill Gates provided support for the claim that people to tend to say things about basic economic theory that are not part of economic theory.





He says that it costs as much to build the 1,000th unit as it cost to produce the 10th. Economists call the additional cost of producing another unit of a good marginal cost. What he is describing is constant marginal cost. The problem is that he drew an upward sloping supply curve. An upward sloping supply curve means that higher and higher prices are required to get suppliers to provide additional units of the good. Why are higher and higher prices required? Because of increasing marginal cost. Gates description of constant marginal cost is thus inconsistent with his graph. This is actually a small problem because Gates could have just as well said that economists assume increasing marginal cost when drawing typical supply and demand curves.

His real point seems to be that there are now many goods for which there are large startup costs and near zero marginal costs. That is how he describes software production. He suggests that this is a new development that arises from the intangible nature of goods like software.

It is not actually a new situation, it does not arise from the product being intangible, and undergraduate economic textbooks have models of this situation.  There are many examples of products for which there are very large start up costs and relatively small (near zero) constant marginal cost. Railroads are not new, and they are not intangible, but they required large expenditures on construction and, once built, the additional cost of another passenger or another bushel of wheat was practically zero.  Insurance is intangible, but it is not obvious that it can be produced at zero marginal cost.

This is a graph from McCloskey’s Applied Theory of Price, which, by the way, is available to you at the amazingly low cost of your time to download it.


Gates concern that the rules have not kept up with the changes in the economy is also not new. People said the same thing in the late nineteenth century with the rise of railroads and other big businesses with high start up costs and low marginal costs. 


Gates does not address the demand side but these are generally firms that have some degree of market power. They face a downward sloping demand like the firm in the graph. Because other people do not regard other goods as perfect substitutes the firm won't lose all of its customers if it raises its price. The more the firm can convince people that other goods are not close substitutes for its good the greater its ability to raise its price above marginal cost. I some ways the more important thing is whether it can keep other companies from offering close substitutes. In other words, can it create what economists call barriers to entry. You can have a great idea, but if you can't keep other people from copying it you are not going to make great profits.

In short,

1. If you want to charge a price that is greater than marginal cost you need to convince people that other goods are not close substitutes for yours. Think of the old Porsche slogan: "Porsche. There is no substitute."

2. If you want to make more than an average rate of profit you need to keep other people from copying you, that is introducing substitutes for your good (or you need to keep coming up with new things that don't have close substitutes).

Those two ideas actually are Econ 101.

Tuesday, June 12, 2018

How I Became a Business Historian (a bit of shameless self-promotion)


Yesterday, the June issue of Enterprise & Society, the journal of the Business History Conference, arrived, and my paper Trust Company Failures and Institutional Change in New York, 1875–1925Enterprise & Society 19, no. 2 (2018): 241-271, is the lead article. And Larry Neal emailed me to tell me how much he liked the paper.

I was think about how I came to write that paper because I did not plan to be a business historian, but there is considerable evidence suggesting that I am one. In addition to Enterprise & Society I have published papers in Business History Review, Business History, and Essays in Economic and Business History.

I had a great opportunity to become a business historian when I was working on my M.Sc. in Economic History at the LSE. I got to work with Geoff Jones, who is one of the leading business historians in the World and currently the Isidor Strauss Professor of Business History at Harvard Business School, but I was interested in the political economy of the opium trade, not business history. Because I was interested in political economy and institutional change I went on to work with Doug North and earn a Ph.D. in economics at Washington University. Prompted by discussions with Andy Rutten, I decided to write my dissertation on the evolution of bankruptcy law in the United States. 

This story about institutional change, the origins of the first lasting bankruptcy law in the United States, turned out to be a story about business history ("Commercial Associations and the Creation of a National Economy: The Demand for Federal Bankruptcy Law," Business History Review 72 (Spring 1998): 86-113).  Because corporate reorganization was not included in the 1898 Bankruptcy Act, I began a separate research project on the origins of corporate reorganization. This story about institutional change also turned out to be a story about businesses trying to shape the law to fit their needs and also ended up in Business History Review ("The People's Welfare and the Origins of Corporate Reorganization: The Wabash Receivership Reconsidered," Business History Review 74 (Autumn 2000): 377-405). That paper won the Newcomen-Harvard Special Award from Harvard Business School and the Newcomen Society. I’ve published papers on a few other things (see my CV if you are interested), but most of my work has been along two paths that were opened by those papers.

The bankruptcy paper led to other papers about the use of bankruptcy law and the evolution of bankruptcy law (“The Role of Path Dependence in the Development of U.S. Bankruptcy Law, 1880-1938” (with Mary Eschelbach Hansen) Journal of Institutional Economics 3 (August 2007): 203 225;  “Crisis and Bankruptcy: The Mediating Role of State Law, 1922-1932,” (with Mary Eschelbach Hansen) Journal of Economic History 72 (2012):440-460; and  “Religion, Social Capital and Business Bankruptcy in the United States, 1921-1932” (with Mary Eschelbach Hansen) Business History 50 (November 2008): 714-727). My wife joined me in this research and we are currently working on a book about bankruptcy in the twentieth century. She also developed another research project that involved collecting and digitizing bankruptcy records, and she has published additional papers out of that project.

The paper on corporate reorganization led to the study of trust companies. Several important corporate reorganization cases involved the Farmers’ Loan and Trust Company. The name was familiar to me from teaching American Economic History because of the income tax case, Pollock v. Farmers’ Loan and Trust Co., and two important railroad regulation cases, Reagan v. Farmers’ Loan and Trust Co. and Stone v. Farmers’ Loan and Trust Co.  I was curious what this company did that left its fingerprints all over nineteenth century legal and economic history. So I wrote a book about the Farmers’ Loan and Trust company and its influence on the law. About the time I finished the book there was increased attention to the Panic of 1907. Descriptions of New York City trust companies as novel, unregulated and reckless did not fit with what I had been reading and writing about trust companies like the Farmers’ Loan and Trust Co.  So I ended up writing a paper that argued that trust companies were not as unregulated as some people suggested and that to understand the Panic one has to understand that not all trust companies were the same. Because I argued that regulation was not as inadequate as had been suggested, I wanted to know how the regulation of trust companies evolved over time, which led to the paper on trust company failures.

In all the cases of institutional change that I have studied there were underlying changes in the costs and benefits of different institutions as well as the costs of seeking institutional change, the sort of things that appear in theories of institutional change, but what most interested me is the creative ways in which people responded to those changes in costs and benefits. I’m most interested in the role of the creative response, to use Schumpeter’s phrase, in the evolution of institutions. In short, I still see the business history that I do as part of the new institutional economics that I set out to do.

Monday, June 11, 2018

Was Slavery Central to American Economic Development?




Antebellum Economic Growth 

Last week on Twitter Matt Yglesias raised a question about changes in how historians interpreted slavery. One historian, Joshua Rothman replied and Edward Baptist added his two cents.



I'm not sure what Rothman means by "in fact and as a matter of history." Perhaps it is reference to Baptist, who prefers to avoid mixing facts with his history. In any case, Rothman seems to believe that the centrality of slavery to American economic development is not something a reasonable person could dispute. I regard myself as a reasonable person. So, on the off chance that someone might be interested in why I would dispute the claim that slavery was central to American economic development I'm going to ask that we take a closer look at the antebellum economy.

The argument against the centrality of slavery is based on two things: the assumption that Rothman is using the word central as it is defined in the dictionary and used by most people, and the available evidence on the antebellum economy. Central means that something is not just important but that it is of primary importance. The central character in a movie is not just an important character, she is the main character, the primary character. This is clearly what Baptist has in mind when he claims that  “the returns from the cotton monopoly powered the modernization of the rest of the American economy” and that "more than $600 million, or almost half of the economic activity in the United States in 1836, derived directly or indirectly from cotton produced by the million odd slaves― 6 percent of the total US population―who in that year toiled in labor camps on slavery’s frontier.” By the wayBaptist's tweet about it being easier to make claims about alternate universes than to come to grips with the past of this one was particularly appropriate given his expertise in making false claims. I and others have shown that Baptist's estimate is nothing but smoke and mirrors, a combination of numbers he makes up and bad accounting; see also Pseudoerasmus posts on Baptist. In addition, Olmstead and Rhode also show that Baptist made up  things that he claimed to have found in the testimonies of enslaved people.  

By the way, if Rothman actually just means to say that slavery was important, I wish he would do that. I don't know anyone who disagrees with that. When, however, he claims that slavery was central to American economic development he is helping Ed Baptist to keep pedaling his snake oil.

To show why I believe that it is not accurate to state that slavery was central to American economic development I begin by reviewing the growth of total output, then I look at the composition of this output, and then I look at the regional distribution of income generated from this production. I argue that the fundamental problems with Rothman's claim are that no one thing was central, and claiming that "one big thing" was central gives a misleading view of economic development.

I should note that the argument is not new. It is essentially the same approach that has been used to counter exaggerated arguments about the role of cotton textiles in the industrial revolution (see McCloskey by way of Pseudoerasmus or the role of railroads in American economic development (see Fogel, but if you want the quick version McCloskey has a back of the envelope calculation of the impact of railroads in The Rhetoric of Economics). I've made essentially the same argument before. I'm hoping that by providing more detail about the antebellum economy that I might clarify the argument, make it more persuasive, and illustrate why most economic historians don't like "one big thing" theories of economic development.

I.                    Overview of Antebellum Economic Growth

Between 1790 and 1860 real GDP grew at a 4.4 percent annual rate, somewhat faster than the long run rate of growth (1790- 2000) of 3.87 percent. However, because population growth was also more rapid than the long run average, per capita real GDP increased at an average annual rate of 1.34 percent, somewhat less than the long run rate of growth of 1.77 percent (all growth rates are from measuringworth.com).

Real GDP in millions of 1996 dollars



Source: Historical Statistics Millennial Edition, Series Ca 9

Real GDP per capita



Source: Historical Statistics of the United States Millennial Edition, Series Ca 11


Keep in mind we are always talking about estimates.  Nevertheless, these are estimates; not just guesses. They are not simply made up numbers. If you want stuff that is just made up rather than based on actual historical research I suggest Ed Baptist’s work. Given these cautions we can look in more detail at antebellum growth, but it is important to keep in mind that when I say something accounted for about 3.9 percent of output in 1850, you should not ignore the about. 


II. What Were People Producing?
               
What were Americans producing in the antebellum period? The table below shows how output was divided between commodities and services. Over the course of the nineteenth century the share of output accounted for by services was increasing, but commodities still accounted for nearly 60 percent of output on the eve of the Civil War.



Source: Gallman, Robert E., and Thomas J. Weiss. "The service industries in the nineteenth century." In Production and productivity in the service industries, pp. 287-381. NBER, 1969.

The next table shows the division of commodity output between different sectors. Over the course of the nineteenth century the  relative importance of manufacturing was increasing, but in the decade preceding the Civil War agriculture still accounted for the majority of commodity output.


Source: Gallman, Robert E. "Commodity Output, 1839-1899." In Trends in the American economy in the nineteenth century, pp. 13-72. Princeton University Press, 1960.

The following table shows how agricultural output was divided between livestock and crops. Unlike the previous tables, these tables show the value of output rather than the share of output. It is, however, apparent that agricultural production was split relatively evenly between crops and livestock.


Source: Towne, Marvin, and Wayne Rasmussen. "Farm gross product and gross investment in the nineteenth century." In Trends in the American economy in the nineteenth century, pp. 255-316. Princeton University Press, 1960.

The next table also shows the value of output and provides a more detailed breakdown of agricultural production. 







Source: Towne, Marvin, and Wayne Rasmussen. "Farm gross product and gross investment in the nineteenth century." In Trends in the American economy in the nineteenth century, pp. 255-316. Princeton University Press, 1960.


On the eve of the Civil War, grain production was the largest source of income from crop production, but the most important single commodity was clearly cotton. Taken as a whole, however, the preceding tables illustrate why it is probably not useful to regard cotton, or any other single good, as the central to American economic development. On the eve of the Civil War, cotton accounted for about 35 percent of the value of crops produced. That is a large percentage, but because crop production was only about 51 percent of agricultural output, cotton only accounted for about 17.8 percent (.35 x .51 = .178) of agricultural production. That is still a large percentage, but if we are interested in cotton’s importance for the whole economy, we must keep going. Because agriculture accounted for 56 percent of commodity output in 1859 and cotton accounted for 17.8 percent of agricultural output, cotton accounted for about 9.9 (.178 x .56 = .099) percent of commodity output. Finally, because commodity output accounted for 59 percent of all output, cotton would have accounted for about 5.8 percent (.099 x .59 = .058) of all output. If you conduct the same exercise for 1850 you would get an estimate of about 4.8 percent. If you compare the cotton values from the above table with estimates of nominal GDP from measuringworth.com, cotton equals 4.95 percent of GDP in 1860 and 4.57 in 1850. Although the second method is more direct, I wanted to show why cotton is a relatively small share of the whole economy: people produced many different things. Even after cotton’s rapid expansion during the first sixty years of the nineteenth century, it accounted for less than 6 percent of GDP. 

I do not have as much information for manufacturing, but Joseph Davis research on industrial production gives us some idea of the growth of industrial output and the relative importance of different components of industrial production. Below is a table showing the weights that he used for different components of his index of industrial production, reflecting their relative importance.  



Source: Historical Statistics Millennial Edition, Series Ca19


Source: Davis, Joseph H. "An annual index of US industrial production, 1790–1915." The Quarterly Journal of Economics 119, no. 4 (2004): 1177-1215.

Employing the same sort of exercise as above, we find that cotton textiles, the largest component in manufacturing in the United States would have accounted for around 3.9 percent (.218 x.30 x .60 = .039) of GDP.

Livestock production accounted for 15.5 percent of output. Food grain production accounted for 3.7 percent. Total grain production accounted for 6.7 percent. 


Let me reiterate my use of the word about. All of these are estimates, and the further back in time we go the more the estimates tend to be based on smaller amounts of evidence. It is all possible that I made an error in here somewhere. New estimates, however, are unlikely to change the overall conclusion because cotton was only a fraction of all crops, crops were only a fraction of all agricultural production, agricultural production was only a fraction of all commodity production, and commodity production was only a fraction of all output. Multiplying fractions tends to generate small fractions relatively quickly. The math just reflects the underlying reality: the United States in the early nineteenth century already produced a wide array of goods and services.


III. Where Were People Producing?                 
One could argue that the focus on cotton does not give an accurate estimate of the impact of slavery. Not all cotton was produced by slaves and slaves produced other things. However, a look at the regional distribution of income also does not support the primacy of slavery in economic development.

Regional variations in personal income reinforce the argument that it is probably not useful to regard slavery and the cotton that enslaved people produced as central to American economic development. The following table shows estimates of personal income generated in different parts of the country.





See also Global Prices and Incomes Database, United States in 1860, Personal Income Totals.

The North’s leading role in the economy was a consequence of both more people and higher per capita output.




Source: Lindert, Peter H., and Jeffrey G. Williamson. American Incomes 1774-1860. No. w18396. National Bureau of Economic Research, 2012.

There is one final argument about the centrality of slavery that I should address. Some people claim that because of the spillover effects of slavery. This for instance is the idea behind Baptist's attempt to add up imaginary estimates to calculate the importance of cotton. There are two problems with this approach. First, you can do it with any good. For wheat I could count land sales, and the cost of transportation, and the cost of equipment, etc. Using Baptistian income accounting I could easily show that the amount of national output accounted for by grains and cotton was greater than the total output. How is that for an alternate universe? The other problem is that the evidence does not support the claims of strong interregional linkages during the antebellum period (see, for instance, this post).    

Conclusion


Slavery was not central to American economic development in the sense that it did not power the modernization of the rest of the economy. The claim that slavery was central to American economic development is factually incorrect: slavery was important, but no one thing was central. The claim also promotes a misleading view of the process of economic growth. It suggests that economic growth is about one big thing. No one thing was big enough to drive economic growth, not railroads, not cotton, not cotton textiles. Explanations for economic development need to explain why people were investing and innovating in a lot of different things. Consequently, economic historians have tended to move away from one big thing theories of economic growth toward understanding the underlying causes of development, such as the emergence of a culture of growth (Mokyr), or the rise of bourgeois values (McCloskey)  or the evolution of growth promoting institutions (North, Wallis and Weingast). 

Slavery was not central to American economic development, but it was an important part of American economic development, and economic historians have devoted considerable attention to understanding slavery its continued impact on the American economy (see, of course, work by Fogel, and Wright, and for a small sample of recent work you can look at Logan, Cook, and ParmanLogan and PritchettNunn, Naidu, and Collins and Wanamaker.