Saturday, February 10, 2018

Three Revolutions in Economic History

 Here is a link to Gareth Austin’s Inaugural Lecture

This is his description of the lecture

The lecture discusses what I would describe as three 'revolutions' in the study of economic history since the era of Sir John Clapham, the first holder of the chair of economic history: (1) the cliometric revolution of the 1960s, which applied neoclassical theory and analytical statistics to the economic past; (2) the emergence in the 1950s-80s of the systematic and continuous study of the economic history of the non-Western word, what may be called 'The Other Economic History'; and (3) the attempt, essentially in the present century, reciprocally to integrate the economic history of the West and the Rest, using quantitative and other methods. The final part of the lecture will be devoted to the pitfalls and promise of this endeavour. In practical terms we have a lot still to do to achieve a genuinely global economic history, based on the principle of reciprocal comparison. In doing this, we need to combine the best insights from the cliometric and other traditions of economic history, respecting the different approaches which historians and economists take to determining causality. Economic History needs to re-affirm its position as the intersection set of the disciplines of History and Economics.

Tuesday, January 16, 2018

Follow up on Capitalism and History

I have seen some interesting responses on twitter to the new Capitalism and History journal that I mentioned yesterday. She is not alone, but I saw Vanessa Ogle’s response first.

I have to admit that I was surprised by the diversity in terms of disciplines and politics and did not notice the lack of diversity on other dimensions. This, however, is not the first time someone has noted that some of the most prominent participants in the New History of Capitalism seem to have problems with race and gender.

Monday, January 15, 2018

Some business history stuff

Here are two recent papers on culture and business history

This paper draws on the literature of experimental economics to suggest a model of cultural change with applications to business history. The model is based on experiments involving the public goods game, in which players are given an initial endowment of money and told that they can keep it or contribute some or all of it to a common fund. The fund earns interest, and, at the conclusion of the game, the total is divided among all the players, regardless of the magnitude of their contributions. In most settings, players initially contribute a significant fraction of their endowment to the fund, but some choose to free ride on others’ investments. If the game is repeated for multiple periods, players observe this free riding and stop putting their money in the fund. If the rules are changed, however, so that free riders can be punished, players will start contributing again and the common fund will grow and provide general benefits. Although this game is typically used to study topics such as tax avoidance and the provision of schools, roads, hospitals, and other similar investments, I argue that cultural practices have many of the features of public goods and that insights from these experiments can be used to explore systematically the dynamics of cultural change.

Culture is easy to study but difficult to specify. This essay attempts to pin down this illusive subject by linking it to entrepreneurship—that is to specific efforts to combine land, labor, capital, and knowledge in the creation of economic activity that has some aspect of novelty. Entrepreneurship is important because of its central role in capitalism. Culture is important because it influences the willingness of individuals to take the risk of exploring possibilities for entrepreneurial ventures even though the most of them will be unsuccessful in the long-run. In search of entrepreneurial culture in America around 1800, this paper examimes immigration, agriculture, commerce, and the beginnings of the Industrial Revolution in the US. These insights are then employed in an examination of the post-WWII efforts of the World Bank—most of which failed—to promote economic growth in nations that had not yet experienced “modernization.”

And here is the flyer for a new journal on Capitalism and History, coming out in 2019. I would love to see a meeting of this advisory board. Although I have been very critical of several people on the list, this looks like it could be a serious attempt to bring together historians and economists working on economic history.

Monday, December 25, 2017

Merry Christmas

The Holy Family by Henry Ossawa Tanner

Monday, December 18, 2017

The Mellon Tax Cuts of the 1920s

Opponents of tax cuts claim that the large income tax cuts in the 1920s caused increased inequality and the Great Depression. For instance, Robert S. McElvaine writes in “I’m a Depression historian. The GOP tax bill is straight out of 1929” Washington Post’s PostEverything Perspective that

The crash followed a decade of Republican control of the federal government during which trickle-down policies, including massive tax cuts for the rich, produced the greatest concentration of income in the accounts of the richest 0.01 percent at any time between World War I and 2007 (when trickle-down economics, tax cuts for the hyper-rich, and deregulation again resulted in another economic collapse).

In 1926, Calvin Coolidge’s treasury secretary, Andrew Mellon, one of the world’s richest men, pushed through a massive tax cut that would substantially contribute to the causes of the Great Depression.

In that decade, the mass-production American economy became dependent on mass consumption. For it to work, the masses need a sufficient share of the national income to be able to consume what is being produced.
Republican policies in the ’20s instead pushed to concentrate more of the income at the top.

On the other hand, proponents of tax cuts have used the 1920s tax cuts (sometimes referred to as the Mellon after the Secretary of the Treasury Andrew Mellon) to illustrate how tax cuts can fuel so much economic growth that they generate increases in revenue. For instance, back in 2003, Veronique de Rugy argued that

The decade of the 1920s had started with very high tax rates and an economic recession. Tax rates were massively increased in 1917 at all income levels. Rates were increased again in 1918. Real GNP fell in 1919, 1920, and 1921 with a total three-year fall of 16 percent. (Deflation between 1920 and 1922 may also help explain the drop in tax revenues in those years, evident in Table 1).

As tax rates were cut in the mid-1920s, total tax revenues initially fell. But as the economy responded and began growing quickly, revenues soared as incomes rose. By 1928, revenues had surpassed the 1920 level even though tax rates had been dramatically cut.

She also notes that Between 1922 and 1929, real gross national product grew at an annual average rate of 4.7 percent and the unemployment rate fell from 6.7 percent to 3.2 percent. 

I am not persuaded that either of these stories clearly establishes connections between cause (tax cuts) and effect (inequality, economic growth, Great Depression).

Both stories attribute a great deal of economic influence to a relatively small federal government. Prior to the Great Depression, the federal revenue typically accounted for less than 5% of GDP. 

Moreover, income taxes accounted for only about half of federal revenue (Statistical Abstract of the United States for 1926 Table No. 169) Neither opponents or proponents of tax cuts explain  how changes that are so small relative to the whole economy could have effects as large as they suggest.

In addition, many of the changes during the 1920s were part of a reversion to pre-War patterns.The federal government lowered income tax rates during the 1920s, but it lowered them from the rates that had been imposed during World War I. By the end of the 1920s the top marginal rates were still almost double what they had been before the War.

Source: http://eh.net/encyclopedia/the-u-s-economy-in-the-1920s/

Likewise, the available evidence suggests that inequality of both income and wealth increased during the 1920s, but they were also moving back toward the rates that had existed before the war.

Source Piketty, Thomas, and Emmanuel Saez. "Income inequality in the United States, 1913–1998." The Quarterly journal of economics 118, no. 1 (2003): 1-41.

From a longer run perspective, the rapid decline of World War I and increase in the 1920s was a blip in a trend of decreasing inequality that was not isolated to the U.S.

Moreover, taxes were cut for all income groups and both the amount and the share of taxes paid by lower income groups decreased.

Source: de Rugy

Even if there is not a clear connection between tax cuts and inequality, inequality did increase. Could that increase in inequality have led to underconsumption as an important cause of the Great Depression? It seems unlikely.

Although inequality increased during the 1920s, it was not immiserating working class people. After the recession of the early 1920s, real wages generally increased until the Great Depression.

Source: http://eh.net/encyclopedia/the-u-s-economy-in-the-1920s/

Dramatic decreases in consumption expenditures were certainly a cause of the severity of the Great Depresion, but they were not an initiating factor. Consumption fell after a tightening of monetary policy and the stock market crash. Consumption fell because of decreases in wealth and income, but also because of increases in uncertainty about the future (Romer 1990, Romer and Romer 2013) and because of the need to reduce current consumption to make installment payments and avoid repossession (Olney 1999). The initial problems were exacerbated by continued bank failures and decreases in the money supply. Economic historians continue to explore the extent to which the problems in money and banking were the result of Federal Reserve failures or problems with the international gold standard. Given the small initial size of the federal government it should perhaps not be surprising that economists tend to find the causes of the Great Depression in monetary rather than fiscal policy.

 What about the alternative argument that the Mellon tax cuts spurred economic growth. Higher income individuals did pay a larger share of income tax after tax rates decreased, but it is not clear that this was because tax cuts spurred rapid economic growth? Here too, I'm skeptical.

The 4.7 percent rate of growth from 1922 to 1929 that de Rugy mentions is very sensitive to beginning and end dates. Much of it comes from very high rates at the beginning and the end. The annualized growth rate from 1923 to 1928 was a much less spectacular 2.8%.

It seem likely that the lower rates simply meant it was no longer worthwhile for high income earners to incur the costs associated with tax avoidance. This was primary the reason that Mellon gave for the tax cuts. 

I'll try to keep an open mind, but I am not yet persuaded that the Mellon tax cuts were able to generate very large macroeconomic economic effects despite the relatively small role of the federal government generally and the federal income tax specifically prior to the Great Depression.

Thursday, December 14, 2017

Clegg on Capitalism and Slavery

I just ran across John Clegg’s  "Credit Market Discipline and Capitalist Slavery in Antebellum South Carolina." Social Science History (2017): 1-34. Clegg got a lot of attention a couple of years ago for "Capitalism and Slavery." in which he criticized the approach of New Historians of Capitalism, especially Edward Baptist. Clegg’s critique was based in part on work that he had done on the role of credit among slaveholders in South Carolina, and that work is presented more fully in this new paper.

Clegg follows Robert Brenner in terms of focusing on competition for the means of production as the driving force behind capitalist growth. Capitalists are forced to increase productivity to survive as capitalists. Clegg’s twist is to add the need to use credit to finance the purchase as land and slaves as the mechanism that drove this competition in the South. He has interesting information about the development of debtor creditor law and the extent to which slaveholders experienced foreclosure.

Clegg explains that
I claim that the ability of creditors to seize the land and slaves of insolvent debtors compelled slave owners to specialize for the market and increase productivity. It did so because most slave owners were in debt, and those who failed to repay their debts at the going rate would end up losing their land and slaves, and thus cease to be slave owners.

He concludes that
if the debt constraint I am describing was operative, then identifiably capitalist outcomes—market orientation, profit maximizing, technical innovation—are in an important sense independent of mentality. This is because slave owners who were not interested in specializing for the market, maximizing profit or adopting cost-reducing innovations would end up losing their slaves to those who were. On this view, capitalist patterns of behavior can be the unintended consequence of competitive selection operating via credit markets

That description made me think of Armen Alchian’s Uncertainty, Evolution and Economic Theory, which made essentially the same argument in defense of economic theory.  I should also mention John Nye’s "Lucky fools and cautious businessmen: On entrepreneurship and the measurement of entrepreneurial failure." The Vital One: Essays in Honor of Jonathan RT Hughes. Research in Economic History 6 (1991): 131-52 which makes a similar sort of evolutionary argument regarding entrepreneurship. 

P.S. If you weren't paying attention when Clegg's first paper came out you might to check out the Junto for some of the discussion it generated.

Tuesday, December 12, 2017