Tuesday, August 15, 2017

Steinbaum on Public Choice

Marshall Steinbaum has published a sort of review of NancyMacLean's Democracy in Chains in which describes “the racist origins of Public Choice theory” and suggests that everyone should read Democracy in Chains “despite its rhetorical shortcomings.”

Steinbaum seems unquestioningly accept MacLean’s claim that Buchanan’s “study of how government officials make decisions became “public choice economics.”” (MacLean xxiii) In making public choice theory and Buchanan's though synonymous, Steinbaum and MacLean strip public choice of all context other than that related to Buchanan. Buchanan, however, was only one of a number of people attempting to apply economic methods (rational choice and models) to the analysis of both politics and political philosophy. Duncan Black’s work was published before Buchanan, and Ken Arrow, William Riker, Vincent Ostrom, Amartya Sen and others were working on this approach in the 1950s and 1960s at the same time as Buchanan. To the best of my knowledge, none of them appear in Democracy in Chains. They are not listed in the index. The point is that there were a lot of people interested in applying the economic approach to politics. Many of them did not have the same normative preferences as Buchanan. It is this broader approach to public choice that you will find in Mueller’s text on the subject. It is even what you will find here at the Library of Economics and Liberty. Public choice is more than James Buchanan.

By the way, this is more of a defense of public choice theory than it is of Buchanan,Virginia, or UVA. The University of Virginia was an avowedly racist and sexist place in the '50s and '60s? UVA was both all white and all male (until the 1970s). To the best of my knowledge neither Buchanan or anyone of his colleagues at the time made any effort to change that. Of course that could be said of most of the men at UVA and a lot of other universities at the time. The liberty they were most concerned with seemed to be the liberty of men like themselves. 


I'll also say that I have no intention of reading the whole book. If you want to say I have no right to criticize it until I have read the whole thing, go ahead. I don’t care. I don’t have enough time to waste on historians that I do not trust. This is particularly true for a subject that I do not regard as my area of expertise. If it is nineteenth or early twentieth century American economic history I can quickly identify inconsistencies and errors, but for other topics I need to have some faith in the historian. For me the bottom line on MacLean’s book is still that there are numerous instances where she did not honestly represent her sources. Misrepresenting your sources is more than a rhetorical shortcoming.

Tuesday, August 8, 2017

Trust Company Failures and Institutional Change in New York, 1875-1925

My paper "Trust Company Failures and Institutional Change in New York, 1875-1925" is now available under First View at Enterprise and Society.

Here are the first two paragraphs


The State of New York created the first trust company in 1822, when
it granted a corporate charter to the Farmers’ Fire Insurance and
Loan Company, later renamed Farmers’ Loan and Trust Company,
and authorized it to act as a trustee. As the name suggests, Farmers
and other early trust companies, like the New York Life Insurance
and Trust Company and the Massachusetts Hospital Life Insurance
Company, also sold insurance, and they provided trusts as an alternative
to insurance. Trust companies later used their trust powers
to facilitate the development of corporate finance by serving as registrars
and transfer agents for corporate securities and as trustees for
corporate mortgages. Trust companies also accepted deposits; by the
middle of the nineteenth century, some of these deposits could be withdrawn
on demand including by check. Thus, by the late nineteenth
century, trust companies in New York occupied a unique position in
the financial system by combining functions associated with banks
with functions associated with trustees.

Between 1875 and 1925, the number of trust companies in New York
State increased from ten to 110, and the total resources of trust companies
increased more rapidly than those of state banks or savings
banks. Trust companies have been characterized as early examples
of “shadow banks,” operating outside the laws and regulations that
applied to commercial banks. However, as with other financial institutions,
New York State trust companies rarely failed. Between 1875
and 1925, the superintendent of banks only intervened eleven times
to deal with troubled trust companies, and in several of these cases
the trust company reopened. Despite this rarity, these failures provide
a path to understanding the overall success of trust companies.
The path leads through institutions: failures played a leading role in
shaping the institutions that governed trust companies. Consequently,
failures shaped the expectations and actions of everyone involved
with trust companies: depositors, shareholders, and executives.