Thursday, October 18, 2018
Wednesday, September 26, 2018
Wednesday, September 5, 2018
Monday, August 20, 2018
Wednesday, August 15, 2018
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.
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
Monday, June 11, 2018
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.
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 way, Baptist'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.
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.
Real GDP in millions of 1996 dollars
Real GDP per capita
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.
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.
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).