Thursday, May 13, 2021

Jonathan Levy's Ages of American Capitalism: My Second Impression


I finally finished grading and had a chance to read a bit more of Levy’s Ages of American Capitalism. I finished the Age of Capital but still have ages of control and chaos to get through. These may take a while; the closer we get to now the less history interests me. In the meantime, I’ll provide my second impression on the book. See here for the first impression.


As a reminder, Levy is trying write a story of American economic history that is more engaged with economics than previous work in the New History of Capitalism (by the way, I think this criticism was probably more valid when Levy began the book than when he finished it) and is organized around three theses.

Thesis #1: “Rather than a physical factor of production, a thing, capital is a process through which a legal asset is invested with pecuniary value in light of its capacity to yield a pecuniary profit.”

Thesis #2 “Capital is defined by the quest for pecuniary profit. Without capitals habitual quest for pecuniary gain there is no capitalism. But the profit motive of capitalists has never been enough to drive economic history, not even the history of capitalism.”

Thesis #3 The history of capitalism is a never-ending conflict between short term propensity to hoard and the long term propensity to invest. This conflict holds the key to explaining many of the dynamics of capitalism over time, including its periods of long term economic development and growth, and its repeating booms and busts.”


To a great extent, Levy lives up to his statement that he wants to engage more with economics than previous work in the new history of capitalism. I thought that this was particularly true in the chapters on the antebellum economy. Much of his interpretation is consistent with the work of economic historians, many of whom he cites; he does a good job describing free banking and general incorporation, the role of state and local governments in supporting transportation improvements, and the importance of intraregional trade in the economic development of the Northeast and Mid-Atlantic. He seems to side more with economists than historians like Baptist on the sources of productivity increase under slavery in the South. He accepts Fogel’s gang system thesis about productivity of enslaved labor in the South, but notes that the thesis is not universally accepted, noting in a footnote that Gavin Wright has challenged it.


On the other hand, I still believe that Levy’s approach to capital is problem. He rejects the definition of capital as a factor of production and the economic models that go with that definition. He insists that capital is a process not a physical thing, but he then presents a story of economic growth that is driven by investment in physical capital, largely ignoring another source of growth: technological change. The problem with this approach becomes particularly apparent when Levy gets to his interpretation of the Industrial Revolution.

Levy suggests that the industrial revolution began in Great Britain in the 1700s and that the U.S. joined its second wave. That sounds okay, but he puts the Industrial Revolution in the U.S. after the Civil War, which is much later than most economic historians would place it. U.S. manufacturers were copying British innovations in textiles by the 1790s, and by the early decades of the 19th century, they were developing their own innovations, such as the Blanchard lathe for woodworking. 


Its not just a difference in timing. Levy defines the Industrial Revolution differently than most economic historians. Economic historians have traditionally defined the Industrial Revolution in terms of technological change. Specifically, changes in technology that increased productivity by allowing people to replace human action with machines and power from animate sources, human and animal, with power from inanimate sources. but as I pointed out before, technological change does not play a significant role in Levy’s story.  

According to Levy: “The best possible definition of industrial revolution, in general, is the process by which the pattern of investment definitely shifts into intermediate capital goods, breeding new economic habits (236).” It is not clear to me what “the process by which the pattern of investment definitely shifts into intermediate capital goods, breeding new economic habits” means.  Whatever it means it is about capital and not about technological change. Perhaps not surprisingly, this emphasis on Keynesian economics and investment in physical capital lead him down a path already trod by Walt Whitman Rostow. Levy explains that: “There is more productive capital in the hands of the same workers. Labor productivity increases and over time enterprises generate more wealth, as money incomes, however distributed, multiply. At a certain point in the process a threshold is reached; there is no going back (236).” One might as well say that there is takeoff into self-sustaining growth.


His emphasis on physical capital also leads to what I regard as an odd choice about how to approach his second thesis. Recall that the second part of thesis 2 was that “the profit motive of capitalists has never been enough to drive economic history, not even the history of capitalism.” This is an interesting claim that could be taken in a number of directions. One of the directions he appropriately follows is the role of government in promoting growth. But another direction he takes it is an insistence that people like Carnegie, and Ford were driven not just by a desire to profit but by the desire to make something. In his treatment of entrepreneurs, like Carnegie and Ford, he emphasizes their willingness to make large investments in fixed capital because they wanted to make things, rather than the technological innovations embodied in this capital. At times he comes close to a traditional great man theory of economic development, in which the vital few drive growth. For Levy, however, their greatness arises not from the innovations in products and processes that they implemented but from their willingness to sacrifice liquidity and make large fixed investments. Nevertheless, it is the psychological characteristics of these individuals that are used to explain large economic changes, rather than the constraints and opportunities that they faced. The approach also seems to imply that they needed to have this desire to make something to keep them from simply focusing on financial manipulation to make profits. Carnegie, Ford, and Rockefeller were, however, the wealthiest people in the country. America’s most prominent financier, J.P. Morgan, may have rivaled them in fame but not in wealth.





I also noted some additional errors or problems with citations in the book:

Referring to people like Gould, Vanderbilt and Drew he states that “They manipulated finance to enrich themselves.” Levy cited page 167 of Lindert and Williamson Unequal Gains. The closest thing I could find on page 167 was “the property share of income(and wealth) rose, and property income became more unequally distributed..”


In his discussion of slavery, he uses the term sunk cost to refer to fixed costs. Fixed costs are costs that do not vary with the level of output; they are fixed. Usually, things like buildings and equipment are fixed.  Sunk costs are costs that are not recoverable. To the extent that you can sell the building and equipment you can recover those costs; they are fixed but not sunk. If you spend $50,000 and three years getting a law degree those costs are sunk. You cannot recover them. Unlike the building and equipment, you cannot sell your degree to someone else to recover the cost. Enslaved people were a fixed cost, but not a sunk cost. As Levy himself points out they were among the most marketable assets.


“River steamboats clocked twenty miles an hour (116).” There is no citation. By 1860, the fastest steamboats on the Hudson could do twenty miles an hour, but Levy is talking about steamboats on the Ohio and the Mississippi in the 1830s. Even in 1860 the average speed would have been closer to half that (see Taylor Transportation Revolution 60 and 138).


Page 95 Writing about the years from the end of the War of 1812 until the Panics of 1837 and 1839 he states that “the commercial economy expanded likely in excess of 1.5 percent GDP per capita per year.” He cites pages 96-141 of Lindert and Williamson. I would prefer a more precise citation. I am also not sure what it means for the commercial economy to expand in excess of 1.5 percent GDP per capita per year. Is it the same as GDP per capita increasing at 1.5 per year. If so, why not just say that? It is possible to find periods of 1.5 % growth in per capita GDP during those years, but you have to carefully select the beginning and end dates, e.g., 1823-136 will do the trick, but the rate for the entire period was about half that.


On page 235 “A farmer might harvest wheat and selling it in a competitive market, earn a higher money income, but that would be the end of it. By contrast Carnegie manufactured steal. Steal an “intermediate” or “capital good” multiplied a whole series of backward and forward linkages, fostering downstream demand for coal and coke, as well as for the components of his factories, while supplying, upstream, goods for railroad corporations and the construction industry.” The obvious problem here is that wheat is an intermediate good, giving rise to demand for reapers and threshers and later tractors, and supplying upstream goods for bakers and manufacturers like the National Biscuit Company (Nabisco).


Levy also cites me. Which is nice. Unfortunately, the citation is a little misleading. On page 315 Levy was describing how Morgan reorganized railroads and wrote that “First, Morgan bankers placed the railroad corporations in preemptive bankruptcies called “friendly receiverships,” perfecting a legal technique employed by Jay Gould during the 1880s.” he cites my paper "The people's welfare and the origins of corporate reorganization: The Wabash receivership reconsidered." The Business History Review (2000): 377-405.  My paper, on the other hand, argues that Gould’s role in the development of receiverships was over-estimated. Specifically. I argued against an interpretation of the development of railroad receiverships first put forward by Albro Martin and widely adopted by other historians. Martin placed Gould at the center of the development of railroad reorganization, arguing that at Gould’s direction Solon Humphreys, a director and former president of the Wabash, St. Louis and Pacific Railway, went into a federal court and asked to have the company, which had not yet defaulted on its bonds, placed in receivership and that he be made the receiver. Martin claimed that these actions were unprecedented, that before this if a company defaulted the creditors went into court and obtained a receiver to look after their interests. But Martin had relied upon a law review article by an attorney who lost a case over the receivership to support the claim that these actions were unprecedented. I showed that far from being unprecedented, these actions were the norm and had been since before the Civil War. Courts had adopted the rationale that railroads were quasi-public, they had been chartered by states to provide transportation services for their citizens and they were damn well going to do that. I do appreciate the citation, but I suspect Levy may have remembered the wrong Business History Review paper. Peter Tufano’s "Business failure, judicial intervention, and financial innovation: Restructuring US railroads in the nineteenth century." The Business History Review (1997): 1-40 focused on Morgan’s actions in reorganizing railroads. It would have been the perfect citation.


In sum, my reading of the book so far continues to be that it has both strengths and weaknesses. I haven’t yet decided which way the scales are tipping. On to the Ages of Control and Chaos.

Tuesday, April 27, 2021

The History of Fredericksburg, VA and the Idea of Reparations


The following excerpt is from The History of the City of Fredericksburg, Virginia prepared by Silvanus Jackson Quinn for the Common Council of the City of Fredericksburg in 1908.  Unfortunately, it does not provide any citations for the story. Nevertheless, parts of the story ring true: the initial hope that justice would be done, the disappointment when it was not, the loss of faith in the government institution, and the authors repetition, a half century after the events, of the belief that it was absurd to think that formerly enslaved people should be compensated.







Saturday, April 24, 2021

A model of Levy's economic theory?


Last week I wrote some thoughts about Jonathan Levy’s new book Ages of American Capitalism. My copy of the book arrived, but I have been too busy with classes to get to it. I did, however, find it interesting that a new working paper from the NBER presented a model of business cycles that (to me at least) sounded very similar to Levy.

Here is how I described Levy’s theory:

“My reading of Levy’s second and third theses together is that he thinks that a preference for holding wealth in a liquid form needs to be overcome to get capitalists to put their assets in things like new farms and factories etc. That this something extra can come from government or culture or both, but it tends to come and go in booms and busts, and growth is a result of the booms. I think there is a lot to this as a story of American economic history, business cycles are certainly one of the central features of American economic history, but I think this story is missing important elements as well.”



The new paper is Risky Business Cycles by Basu, Susanto, Giacomo Candian, Ryan Chahrour, and Rosen Valchev. No. w28693. National Bureau of Economic Research, 2021.


Here is the abstract:

“We identify a shock that explains the bulk of fluctuations in equity risk premia and show that the shock also explains a large fraction of the business-cycle comovements of output, consumption, employment, and investment. Recessions induced by the shock are associated with reallocation away from full-time permanent positions, towards part-time and flexible contract workers. A real model with labor market frictions and fluctuations in risk appetite can explain all of these facts, both qualitatively and quantitatively. The size of risk-driven fluctuations depends on the relationship between the riskiness and productivity of different stores of value: if safe savings vehicles have relatively low marginal products, then a flight to safety will drive a larger aggregate contraction.”

This is from the conclusion, and I think it is much clearer than the abstract or introduction:

“This paper shows that fluctuations in risk premia can be major drivers of macroeconomic fluctuations. Our empirical analysis suggests the possibility of a major causal pathway flowing from risk premia to macroeconomic fluctuations, and our theory embodies one such a pathway. In our model, heightened risk premia cause recessions because they drive reallocation of saving towards safer stores of value, which simultaneously have low instantaneous marginal products. Thus, our theory contrasts with many business cycles models that emphasize the effects of intertemporal substitution, and instead puts risk premia and their effects on precautionary saving at the center of macroeconomic propagation. In this respect, our model bridges a gap between the tradition of risk-driven business cycles `a la Keynes and the central lessons of modern macro-finance summarized in Cochrane (2017)”